What changed in this filing

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Item 1. Financial Statements

2021-08-06 compared with 2021-05-07 · 750 added, 434 removed, 2039 unchanged (37% of the section changed)

3 unchanged sentences

(dollars in millions except per share and share amounts)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Investment portfolio:

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $ 8,267 and $ 8,204 , allowance for credit loss of $ 81 and $ 78 )

Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $ 8,266 and $ 8,204 , net of allowance for credit loss of $ 39 and $ 78 )

$ 8,819 $ 8,773

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Total assets $ 17,226 $ 15,334

Liabilities and shareholders’ equity

Unearned premium reserve $ 3,704 $ 3,735

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Total liabilities 10,653 8,629

Commitments and contingencies (see Note 13)

Commitments and contingencies (Note 13)

Redeemable noncontrolling interests (see Note 9) 21 21

Shareholders’ equity

Common shares ($ 0.01 par value, 500,000,000 shares authorized;

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(dollars in millions except per share amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net earned premiums $ 102 $ 121 $ 205 $ 224

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Fair value gains (losses) on committed capital securities ( 6 ) ( 25 ) ( 25 ) 23

Fair value gains (losses) on financial guaranty variable interest entities 5 ( 9 )

Fair value gains (losses) on consolidated investment vehicles 21 31 37 19

Foreign exchange gains (losses) on remeasurement 5 2 5 ( 60 )

Commutation gain (losses) — 38 — 38

Other income (loss)

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(in millions)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

Net income (loss) $ 102 $ 188 $ 117 $ 130

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Investments with credit impairment, net of tax provision (benefit) of $ 6 , $ 6 , $ 5 and $( 7 )

24 25 18 ( 27 )

Change in net unrealized gains (losses) on investments 75 200 ( 50 ) ( 14 )

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(dollars in millions, except share data)

For the Three Months Ended March 31, 2021

For the Three Months Ended June 30, 2021

Common Shares Outstanding Common

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Shareholders’ Equity

Balance at March 31, 2021 75,935,382 $ 1 $ 6,055 $ 373 $ 1 $ 6,430 $ 42 $ 6,472

Net income — — 98 — — 98 4 102

Dividends ($ 0.22 per share)

— — ( 17 ) — — ( 17 ) — ( 17 )

Contributions — — — — — — 6 6

Common shares repurchases ( 1,887,531 ) — ( 88 ) — — ( 88 ) — ( 88 )

Share-based compensation 64,703 — 8 — — 8 — 8

Distributions — — — — — — ( 3 ) ( 3 )

Other comprehensive income — — — 72 — 72 — 72

Balance at June 30, 2021 74,112,554 $ 1 $ 6,056 $ 445 $ 1 $ 6,503 $ 49 $ 6,552

For the Three Months Ended June 30, 2020

Common Shares Outstanding Common

Par Value Retained Earnings Accumulated

Comprehensive Income Deferred

Equity Compensation Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.

Nonredeemable Noncontrolling Interests Total

Shareholders’ Equity

Balance at March 31, 2020 89,983,322 $ 1 $ 6,100 $ 138 $ 1 $ 6,240 $ 25 $ 6,265

Net income — — 183 — — 183 5 188

Dividends ($ 0.20 per share)

— — ( 17 ) — — ( 17 ) — ( 17 )

Reallocation of ownership interest — — — — — — 8 8

Contributions — — — — — — 23 23

Common shares repurchases ( 5,956,422 ) — ( 164 ) — — ( 164 ) — ( 164 )

Share-based compensation 35,484 — 7 — — 7 — 7

Distributions — — — — — — ( 16 ) ( 16 )

Other comprehensive income — — — 195 — 195 — 195

Balance at June 30, 2020 84,062,384 $ 1 $ 6,109 $ 333 $ 1 $ 6,444 $ 45 $ 6,489

Assured Guaranty Ltd.

Condensed Consolidated Statements of Shareholders’ Equity (unaudited) - (Continued)

(dollars in millions, except share data)

For the Six Months Ended June 30, 2021

Common Shares Outstanding Common

Par Value Retained Earnings Accumulated

Comprehensive Income Deferred

Equity Compensation Total Shareholders’ Equity Attributable to Assured Guaranty Ltd.

Nonredeemable Noncontrolling Interests Total

Shareholders’ Equity

Balance at December 31, 2020 77,546,896 $ 1 $ 6,143 $ 498 $ 1 $ 6,643 $ 41 $ 6,684

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Other comprehensive loss — — — ( 53 ) — ( 53 ) — ( 53 )

Balance at March 31, 2021 75,935,382 $ 1 $ 6,055 $ 373 $ 1 $ 6,430 $ 42 $ 6,472

For the Three Months Ended March 31, 2020

Balance at June 30, 2021 74,112,554 $ 1 $ 6,056 $ 445 $ 1 $ 6,503 $ 49 $ 6,552

For the Six Months Ended June 30, 2020

Common Shares Outstanding Common

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— — ( 36 ) — — ( 36 ) — ( 36 )

Reallocation of ownership interest — — — — — — 10 10

Contributions — — — — — — 41 41

Common shares repurchases ( 9,585,832 ) — ( 280 ) — — ( 280 ) — ( 280 )

Share-based compensation 373,229 — 2 — — 2 — 2

Distributions — — — — — — ( 16 ) ( 16 )

Other comprehensive loss — — — ( 9 ) — ( 9 ) — ( 9 )

Contributions and reallocation of ownership interests — — — — — — 20 20

Balance at March 31, 2020 89,983,322 $ 1 $ 6,100 $ 138 $ 1 $ 6,240 $ 25 $ 6,265

Balance at June 30, 2020 84,062,384 $ 1 $ 6,109 $ 333 $ 1 $ 6,444 $ 45 $ 6,489

The accompanying notes are an integral part of these condensed consolidated financial statements.

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(in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Net cash flows provided by (used in) operating activities $ ( 949 ) $ ( 445 )

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Purchases ( 788 ) ( 627 )

Sales 226 490

Maturities and paydowns 499 373

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Net paydowns of financial guaranty variable interest entities’ liabilities ( 23 ) ( 52 )

Issuance of long-term debt, net of issuance costs 495 —

Paydown of long-term debt ( 1 ) ( 22 )

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Proceeds from issuance of collateralized loan obligations 1,132 362

Repayment of collateralized loan obligations ( 2 ) —

Proceeds from issuance of warehouse financing debt 546 —

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(in millions)

Three Months Ended March 31,

Six Months Ended June 30,

Supplemental cash flow information

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Interest on long-term debt $ 40 $ 41

March 31, 2021 March 31, 2020

June 30, 2021 June 30, 2020

Reconciliation of cash and restricted cash to the condensed consolidated balance sheets:

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Cash of consolidated investment vehicles (see Note 9) 148 175

Cash and restricted cash at the end of period $ 346 $ 221

Cash and restricted cash at end of period $ 296 $ 473

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Notes to Condensed Consolidated Financial Statements (unaudited)

March 31, 2021

June 30, 2021

Business and Basis of Presentation

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Actual results could differ from those estimates.

These unaudited interim condensed consolidated financial statements are as of March 31, 2021 and cover the three-month period ended March 31, 2021 (First Quarter 2021) and the three-month period ended March 31, 2020 (First Quarter 2020).

These unaudited interim condensed consolidated financial statements are as of June 30, 2021 and cover the three-month period ended June 30, 2021 (Second Quarter 2021), the three-month period ended June 30, 2020 (Second Quarter 2020), the six-month period ended June 30, 2021 (Six Months 2021) and the six-month period ended June 30, 2020

(Six Months 2020).

Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but is not required for interim reporting purposes, has been condensed or omitted.

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Certain prior year balances have been reclassified to conform to the current year's presentation.

The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries and include its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs).

The unaudited interim condensed consolidated financial statements include the accounts of AGL, its direct and indirect subsidiaries, and its consolidated financial guaranty VIEs (FG VIEs) and consolidated investment vehicles (CIVs).

Intercompany accounts and transactions between and among all consolidated entities have been eliminated.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in AGL’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020, filed with the U.S.

Securities and Exchange Commission (SEC).

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On February 24, 2021, the Company received the last regulatory approval required to execute a multi-step transaction to merge MAC with and into AGM, with AGM as the surviving company.

As a result, the Company wrote-off the $ 16 million carrying value of MAC's insurance licenses in First Quarter 2021, which was recorded in other operating expenses in the Insurance segment.

As a result, the Company wrote-off the $ 16 million carrying value of MAC's insurance licenses in the first quarter of 2021, which was recorded in other operating expenses in the Insurance segment.

AGM, AGC and, until its merger with AGM on April 1, 2021, MAC, (collectively, the U.S.

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• improve the effectiveness of the required disclosures.

This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accounting for certain specialty (non-financial guaranty) contracts.

This ASU does not affect the Company’s financial guaranty insurance contracts, but may affect its accounting for certain specialty (non-financial guaranty) insurance contracts.

In November 2020, the FASB deferred the effective date of this ASU to January 1, 2023 with early adoption permitted.

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In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848):

Scope , which clarifies that certain optional expedients and exceptions in Topic 848 apply to derivatives that are affected by the discounting transition, regardless of whether derivatives reference LIBOR or another rate expected to be discontinued because of reference rate reform.

Discounting transition refers to the changing of interest rates used for margining, discounting, or contract price alignment of derivatives to transition to alternative rates.

Scope , which clarifies the scope of relief related to ASU 2020-04.

This ASU became effective upon issuance and may be applied on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022.

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The following describes the components of each segment, along with the Corporate division and Other categories.

The Insurance and Asset Management segments are presented without giving effect to the consolidation of FG VIEs and those AssuredIM investment vehicles for which the Company is deemed the primary beneficiary (consolidated investment vehicles, or CIVs as described in Note 9, Variable Interest Entities).

The Insurance and Asset Management segments are presented without giving effect to the consolidation of FG VIEs and those AssuredIM investment vehicles (primarily funds and CLOs) for which the Company is deemed to be the primary beneficiary (CIVs).

See Note 9, Variable Interest Entities.

The Insurance segment primarily consists of the Company's insurance subsidiaries that provide credit protection products to the U.S.

and international public finance (including infrastructure) and structured finance markets.

The Insurance segment is presented without giving effect to the consolidation of FG VIEs and therefore includes premiums and losses of all financial guaranty contracts, whether or not the associated FG VIEs are consolidated, and also includes its share of earnings from AssuredIM Funds in which the Insurance segment invests.

The Asset Management segment consists of AssuredIM, which provides asset management services to outside investors as well as to the U.S.

In the case of FG VIEs, the Insurance segment includes premiums and losses of the financial guaranty insurance policies associated with the FG VIEs' debt.

In the case of CIVs, the Insurance segment includes the insurance subsidiaries' share of earnings from its investments in AssuredIM Funds.

The Asset Management segment consists of AssuredIM, which provides asset management services to third party investors as well as to the U.S.

Insurance Subsidiaries and AGAS.

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Segment Information

Three Months Ended March 31, 2021

Second Quarter 2021

Insurance Asset Management Corporate Other Total

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Adjusted operating income (loss) $ 152 $ ( 2 ) $ ( 34 ) $ 4 $ 120

Three Months Ended March 31, 2020

Second Quarter 2020

Insurance Asset Management Corporate Other Total

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Adjusted operating income (loss) $ 154 $ ( 9 ) $ ( 26 ) $ — $ 119

Six Months Ended June 30, 2021

Insurance Asset Management Corporate Other Total

(in millions)

Third-party revenues $ 357 $ 37 $ — $ 56 $ 450

Intersegment revenues 4 4 — ( 8 ) —

Total revenues 361 41 — 48 450

Total expenses 153 53 68 11 285

Income (loss) before income taxes and equity in earnings of investees 208 ( 12 ) ( 68 ) 37 165

Equity in earnings of investees 67 — — ( 24 ) 43

Adjusted operating income (loss) before income taxes 275 ( 12 ) ( 68 ) 13 208

Provision (benefit) for income taxes 44 ( 3 ) ( 5 ) 1 37

Noncontrolling interests — — — 8 8

Adjusted operating income (loss) $ 231 $ ( 9 ) $ ( 63 ) $ 4 $ 163

Six Months Ended June 30, 2020

Insurance Asset Management Corporate Other Total

(in millions)

Third-party revenues $ 437 $ 28 $ ( 4 ) $ 23 $ 484

Intersegment revenues 5 2 — ( 7 ) —

Total revenues 442 30 ( 4 ) 16 484

Total expenses 174 52 67 3 296

Income (loss) before income taxes and equity in earnings of investees 268 ( 22 ) ( 71 ) 13 188

Equity in earnings of investees 17 — ( 5 ) ( 16 ) ( 4 )

Adjusted operating income (loss) before income taxes 285 ( 22 ) ( 76 ) ( 3 ) 184

Provision (benefit) for income taxes 46 ( 4 ) ( 11 ) ( 1 ) 30

Noncontrolling interests — — — 2 2

Adjusted operating income (loss) $ 239 $ ( 18 ) $ ( 65 ) $ ( 4 ) $ 152

Reconciliation of Net Income (Loss) Attributable to AGL

to Adjusted Operating Income (Loss)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2021 2020 2021 2020

(in millions)

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The Company also writes specialty insurance and reinsurance that is consistent with its risk profile and benefits from its underwriting experience.

The Company seeks to limit its exposure to losses by underwriting obligations that it views as investment grade at inception, although on occasion it may underwrite new issuances that it views as below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures.

The Company seeks to limit its exposure to losses by underwriting obligations that it views to be investment grade at inception, although on occasion it may underwrite new issuances that it views to be below-investment-grade (BIG), typically as part of its loss mitigation strategy for existing troubled exposures.

The Company also seeks to acquire portfolios of insurance from financial guarantors that are no longer writing new business by acquiring such companies, providing reinsurance on a portfolio of insurance or reassuming a portfolio of reinsurance it had previously ceded;

in such instances, it evaluates the risk

characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction.

in such instances, it evaluates the risk characteristics of the target portfolio, which may include some BIG exposures, as a whole in the context of the proposed transaction.

The Company diversifies its insured portfolio across sector and geography and, in the structured finance portfolio, typically requires subordination or collateral to protect it from loss.

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state or municipal governmental authorities, as well as tax-supported bonds, revenue bonds and other obligations supported by covenants from state or municipal governmental authorities or other municipal obligors to impose and collect fees and charges for public services or specific infrastructure projects.

The Company also includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings.

The Company also includes within public finance similar obligations issued by territorial and non-U.S.

The Company includes within public finance obligations those obligations backed by the cash flow from leases or other revenues from projects serving substantial public purposes, including utilities, toll roads, healthcare facilities and government office buildings.

The Company also includes within public finance obligations similar obligations issued by territorial and non-U.S.

sovereign and sub-sovereign issuers and governmental authorities.

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Some of these VIEs are consolidated as described in Note 9, Variable Interest Entities.

Unless otherwise specified, the outstanding par and principal and interest (debt service) amounts presented in this note include outstanding exposures on these VIEs whether or not they are consolidated.

Unless otherwise specified, the outstanding par and principal and interest (debt service) amounts presented in this note include outstanding exposures on

these VIEs whether or not they are consolidated.

Debt service is a measure of the estimated maximum potential exposure to insured obligations before considering the Company’s various legal rights to the underlying collateral and other remedies available to it under its financial guaranty contract.

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Surveillance Categories

The Company segregates its insured portfolio into investment grade and BIG surveillance categories to facilitate the appropriate allocation of resources to monitoring and loss mitigation efforts and to aid in establishing the appropriate cycle for periodic review for each exposure.

BIG exposures include all exposures with internal credit ratings below BBB-.

The Company’s internal credit ratings are based on internal assessments of the likelihood of default and loss severity in the event of default.

Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and are generally reflective of an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings focus on future performance rather than lifetime performance.

The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as the higher of 'AA' or their current internal rating.

Internal credit ratings are expressed on a ratings scale similar to that used by the rating agencies and generally reflect an approach similar to that employed by the rating agencies, except that the Company's internal credit ratings focus on future performance rather than lifetime performance.

The Company classifies those portions of risks benefiting from reimbursement obligations collateralized by eligible assets held in trust in acceptable reimbursement structures as being the higher of 'AA' or their current internal rating.

Unless otherwise noted, ratings disclosed herein on the Company's insured portfolio reflect its internal ratings.

The Company monitors its insured portfolio and refreshes its internal credit ratings on individual exposures in quarterly, semi-annual or annual cycles based on the Company’s view of the exposure’s credit quality, loss potential, volatility and sector.

Ratings on exposures in sectors identified as under the most stress or with the most potential volatility are reviewed every quarter, although the Company may also review a rating in response to developments impacting the credit when a ratings review is not scheduled.

For assumed exposures, the Company may use the ceding company’s credit ratings of transactions where it is impractical for it to assign its own rating.

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Impact of COVID-19 Pandemic

The novel coronavirus that emerged in Wuhan, China in late 2019 and which causes the coronavirus disease known as COVID-19 was declared a pandemic by the World Health Organization in early 2020 and continues to spread throughout the world.

The coronavirus disease known as COVID-19 was declared a pandemic by the World Health Organization in early 2020 and continues to spread throughout the world.

Several vaccines have been developed and approved by governments, and distribution of vaccines is proceeding unevenly across the globe.

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While the COVID-19 pandemic has been impacting the global economy and the Company for over a year now, its ultimate size, depth, course and duration, and the effectiveness, acceptance and distribution of vaccines for it, remain unknown, and the governmental and private responses to the pandemic continue to evolve.

Consequently, and due to the nature of the Company's business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time.

Consequently, and due to the nature of the Company's

business, all of the direct and indirect consequences of COVID-19 on the Company are not yet fully known to the Company, and still may not emerge for some time.

For information about how the COVID-19 pandemic has impacted the Company's loss projections, see Note 4, Expected Loss to be Paid (Recovered).

The Company's surveillance department has established supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn.

In addition, the Company's surveillance department has been in contact with certain of its credits that it believes may be more at risk from COVID-19 and governmental and private responses to COVID-19.

The Company's internal ratings and loss projections reflect this augmented surveillance activity.

Through May 6, 2021, the Company has paid only relatively small first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19.

From shortly after the pandemic reached the U.S.

through early 2021 the Company's surveillance department conducted supplemental periodic surveillance procedures to monitor the impact on its insured portfolio of COVID-19 and governmental and private responses to COVID-19, with emphasis on state and local governments and entities that were already experiencing significant budget deficits and pension funding and revenue shortfalls, as well as obligations supported by revenue streams most impacted by various closures and capacity and travel restrictions or an economic downturn.

Given significant federal funding in 2021 and the performance it observed, the Company's surveillance department has reduced these supplemental procedures, but is still monitoring those sectors it identified as most at risk for any developments related to COVID-19 that may impact the ability of issuers to make upcoming debt service payments.

The Company's internal ratings and loss projections reflect its supplemental COVID-19 surveillance activity.

Through August 5, 2021, the Company has paid only relatively small first-time insurance claims it believes are due at least in part to credit stress arising specifically from COVID-19.

The Company currently projects nearly full reimbursement of these relatively small claims.

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mitigate the economic effect of insured losses (loss mitigation securities).

The Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding, which amounts are included in the investment portfolio, because the Company manages such securities as investments and not insurance exposure.

As of March 31, 2021 and December 31, 2020, the Company excluded $ 1.3 billion and $ 1.4 billion, respectively, of net par attributable to loss mitigation securities, respectively.

Gross debt service outstanding represents the sum of all estimated future debt service payments on the obligations insured, on an undiscounted basis.

The Company excludes amounts attributable to loss mitigation securities from par and debt service outstanding, and instead includes such amounts in the investment portfolio, because the Company manages such securities as investments and not insurance exposure.

As of June 30, 2021 and December 31, 2020, the Company excluded from net par $ 1.3 billion and $ 1.4 billion, respectively, attributable to loss mitigation securities.

Gross debt service outstanding represents the sum of all estimated future debt service payments on the insured obligations, on an undiscounted basis.

Net debt service outstanding equals gross debt service outstanding net of any reinsurance.

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The calculation of debt service requires the use of estimates, which the Company updates periodically, including estimates for the expected remaining term of insured obligations supported by homogeneous pools of assets, updated interest rates for floating and variable rate insured obligations, behavior of consumer price indices for obligations with consumer price index inflators, foreign exchange rates and other assumptions based on the characteristics of each insured obligation.

The anticipated sunset of LIBOR after June, 30, 2023 has introduced another variable into the Company's calculation of future debt service.

anticipated sunset of LIBOR after June, 30, 2023 has introduced another variable into the Company's calculation of future debt service.

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Outstanding Net Debt Service

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020

(in millions)

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by Internal Rating

As of March 31, 2021

As of June 30, 2021

Public Finance

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Total net par outstanding $ 171,597 100.0 % $ 53,028 100.0 % $ 8,952 100.0 % $ 576 100.0 % $ 234,153 100.0 %

In addition to amounts shown in the table above, the Company had outstanding commitments to provide guaranties of $ 673 million of public finance gross par and $ 629 million of structured finance gross par as of March 31, 2021.

In addition to amounts shown in the tables above, the Company had outstanding commitments to provide guaranties of $ 1,437 million of public finance gross par and $ 777 million of structured finance gross par as of June 30, 2021.

These commitments are contingent on the satisfaction of all conditions set forth in them and may expire unused or be canceled at the counterparty’s request.

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Components of BIG Net Par Outstanding

As of March 31, 2021

As of June 30, 2021

BIG Net Par Outstanding Net Par

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and Number of Risks

As of March 31, 2021

As of June 30, 2021

Net Par Outstanding Number of Risks (2)

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Exposure to Puerto Rico

The Company had insured exposure to general obligation bonds of the Commonwealth of Puerto Rico (Puerto Rico or the Commonwealth) and various obligations of its related authorities and public corporations aggregating $ 3.7 billion net par as of March 31, 2021, all of which was rated BIG.

Beginning on January 1, 2016, a number of Puerto Rico exposures have defaulted on bond payments, and the Company has now paid claims on all of its outstanding Puerto Rico exposures except the Municipal Finance Agency (MFA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the University of Puerto Rico (U of PR).

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Title III of PROMESA provides for a process analogous to a voluntary bankruptcy process under chapter 9 of the United States Bankruptcy Code (Bankruptcy Code).

The Company believes that a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations the Company insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as a party.

See “Puerto Rico Litigation” below.

Despite these concerns, the Company has engaged in negotiations with the FOMB and other stakeholders in an attempt to reach a consensual resolution, with particular progress being made in the early part of 2021.

On February 22, 2021, AGM and AGC agreed to support the revised Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) subject to reaching a satisfactory resolution with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA) bonds it insures.

On May 5, 2021, AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to the PRHTA and the PRCCDA bonds it insures.

With the signing of the HTA/CCDA PSA and the expiration of the related withdrawal rights of AGM and AGC under the GO/PBA PSA, AGM and AGC became bound to the GO/PBA PSA.

On February 22, 2021, AGM and AGC entered into a revised Puerto Rico General Obligation (GO) and Public Buildings Authority (PBA) plan support agreement (PSA) (GO/PBA PSA) with certain other stakeholders, the Commonwealth, and the FOMB.

Then, on May 5, 2021, AGM and AGC entered into a PSA (HTA/CCDA PSA) with certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Highways and Transportation Authority (PRHTA) and the Puerto Rico Convention Center District Authority (PRCCDA).

More recently, on July 28, 2021, AGC joined the PSA (PRIFA

PSA) signed on July 27, 2021 by certain other stakeholders, the Commonwealth, and the FOMB with respect to the Puerto Rico Infrastructure Financing Authority (PRIFA).

Previously, on May 3, 2019, AGM and AGC entered into a restructuring support agreement (PREPA RSA;

together with the GO/PBA PSA and the HTA/CCDA PSA, the Support Agreements) with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds.

With the signing of the HTA/CCDA PSA and with the GO/PBA PSA now binding the Company, $ 3,484 million, or 93.5 % of the Company’s insured net par outstanding of Puerto Rico exposures is covered by a Support Agreement.

together with the GO/PBA PSA, HTA/CCDA PSA, and PRIFA PSA, the Support Agreements) with the Puerto Rico Electric Power Authority (PREPA) and other stakeholders, including a group of uninsured PREPA bondholders, the Commonwealth and FOMB, that is intended to, among other things, provide a framework for the consensual resolution of the treatment of the Company’s insured PREPA revenue bonds.

With AGM and AGC agreeing to the HTA/CCDA PSA, GO/PBA PSA, and PRIFA PSA, $ 3,500 million, or 94 % of the Company’s insured net par outstanding of Puerto Rico exposures, is covered by a Support Agreement.

Each Support Agreement includes a number of conditions and the related debtor’s plan of adjustment must be approved by the Title III court, so there can be no assurance that the consensual resolutions embodied in the Support Agreements will be achieved in their current form, or at all.

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Support Agreements

As of March 31, 2021, the Company had $ 1,246 million of insured net par outstanding that is now covered by the GO/PBA PSA:

As of June 30, 2021, the Company had $ 1,246 million of insured net par outstanding that is now covered by the GO/PBA PSA:

$ 1,112 million insured net par outstanding of GOs and $ 134 million insured net par outstanding of PBA bonds.

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On February 22, 2021, the FOMB entered into the GO/PBA PSA with certain GO and PBA bondholders and insurers (including AGM and AGC) representing approximately $ 11.7 billion, or approximately 62 % of the aggregate amount of general obligation and PBA bond claims.

In general, the GO/PBA PSA provides for lower Commonwealth debt service payments per

annum relative to the Plan Support Agreement signed in February 2020 (February 2020 PSA), extends the tenor of new recovery bonds, increases the amount of cash distributed to creditors, and provides additional consideration in the form of a contingent value instrument (CVI).

In general, the GO/PBA PSA provides for lower Commonwealth debt service payments per annum and provides for the distribution to creditors of new recovery bonds, cash, and additional consideration in the form of a contingent value instrument (CVI).

This CVI is intended to provide creditors with additional returns tied to outperformance of the Puerto Rico 5.5% Sales and Use Tax receipts against May 2020 certified fiscal plan projections, subject to annual and lifetime caps.

The GO/PBA PSA provides for different recoveries based on the bonds’ vintage issuance date, with GO and PBA bonds issued before 2011 (Vintage) receiving higher recoveries than GO and PBA bonds issued in 2011 and thereafter (except that, for purposes of the GO PSA, Series 2011A GO bonds would be treated as Vintage bonds).

On March 8, 2021, the FOMB filed with the Title III court a Second Amended Title III Joint Plan of Adjustment of the Commonwealth (Amended POA) that seeks to restructure approximately $ 35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $ 50 billion in pension obligations.

The Amended POA includes the terms of the settlement embodied in the GO/PBA PSA.

The HTA/CCDA PSA requires the Amended POA to be further amended to, among other things, embody the terms of the clawback-related settlement contemplated by the HTA/CCDA PSA.

On July 27, 2021, the FOMB filed with the Title III court a Sixth Amended Title III Joint Plan of Adjustment of the Commonwealth (Amended POA) that seeks to restructure approximately $ 35 billion of debt (including the GO bonds) and other claims against the government of Puerto Rico and certain entities and $ 50 billion in pension obligations consistent with the terms of the settlements embodied in the GO/PBA PSA and the HTA/CCDA PSA.

On July 29, 2021, the Title III court approved the form of disclosure statement for the Amended POA.

The Title III court has indicated that voting on the Amended POA will occur by early October 2021 and that a confirmation hearing on the Amended POA will occur in early November 2021.

HTA/CCDA PSA.

As of March 31, 2021, the Company had $ 1,462 million of insured net par outstanding that is now covered by the HTA/CCDA PSA:

As of June 30, 2021, the Company had $ 1,462 million of insured net par outstanding that is now covered by the HTA/CCDA PSA:

$ 817 million insured net par outstanding of PRHTA (transportation revenue) bonds;

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The FOMB has filed a petition under Title III of PROMESA with respect to PRHTA.

There were sufficient funds in the PRCCDA bond accounts to make only partial payments on the July 1, 2017 PRCCDA bond payments guaranteed by the Company, and the Company has been making claim payments on these bonds since that date.

The PRCCDA defaulted on a portion of its July 1, 2017 debt service payments, and the Company has been making claim payments on these bonds since that date.

The HTA/CCDA PSA provides for payments to AGM and AGC consisting of (i) cash, (ii) in the case of PRHTA, new bonds expected to be backed by toll revenue (Toll Bonds);

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Under the HTA/CCDA PSA, bondholders and bond insurers of PRCCDA will receive, in the aggregate, $ 112 million in cash and the CVI.

On June 26, 2020, the FOMB certified a revised fiscal plan for PRHTA.

On May 27, 2021 the FOMB certified a revised fiscal plan for PRHTA.

The revised certified PRHTA fiscal plan will need to be further revised to be consistent with the HTA/CCDA PSA.

As of March 31, 2021, the Company had $ 776 million insured net par outstanding of PREPA obligations subject to the PREPA RSA.

As of June 30, 2021, the Company had $ 776 million insured net par outstanding of PREPA obligations subject to the PREPA RSA.

The PREPA obligations are secured by a lien on the revenues of the electric system.

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and therefore that its economic results could differ from those reflected in the PREPA RSA.

On June 29, 2020, the FOMB certified a revised fiscal plan for PREPA.

The revised certified PREPA fiscal plan projects no capacity to pay debt service over the five -year forecast period without incurring rate increases.

On May 27, 2021, the FOMB certified a revised fiscal plan for PREPA.

The revised certified PREPA fiscal plan will need to be further revised to be consistent with the PREPA RSA.

As of June 30, 2021, the Company had $ 16 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to PRIFA and its bondholders of a portion of federal excise taxes paid on rum.

The Company has been making claim payments on the PRIFA bonds since January 2016.

The PRIFA PSA provides for payments to AGC consisting of (i) cash, (ii) CVI, and (iii) a contingent value instrument based on potential outperformance of Puerto Rico’s general fund rum tax collections relative to projections in the 2021 certified fiscal plan (Rum Tax CVI).

Under the PRIFA PSA, bondholders and bond insurers of PRIFA will receive, in the aggregate, $ 204 million in cash, the CVI, and the Rum Tax CVI.

Other Puerto Rico Exposures

As of March 31, 2021, the Company had $ 223 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.

As of June 30, 2021, the Company had $ 223 million net par outstanding of bonds issued by MFA secured by a lien on local property tax revenues.

The MFA bond accounts contained sufficient funds to make the MFA bond payments due through the date of this filing that were guaranteed by the Company, and those payments were made in full.

Puerto Rico Infrastructure Financing Agency ( PRIFA).

As of March 31, 2021, the Company had $ 16 million insured net par outstanding of PRIFA bonds, which are secured primarily by the return to PRIFA and its bondholders of a portion of federal excise taxes paid on rum.

The Company has been making claim payments on the PRIFA bonds since January 2016.

As of March 31, 2021, the Company had $ 1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.

As of June 30, 2021, the Company had $ 1 million insured net par outstanding of U of PR bonds, which are general obligations of the university and are secured by a subordinate lien on the proceeds, profits and other income of the university, subject to a senior pledge and lien for the benefit of outstanding university system revenue bonds.

As of the date of this filing, all debt service payments on U of PR bonds insured by the Company have been made.

In the fourth quarter of 2020, $ 372 million of PRASA obligations insured by the Company were refunded, reducing the Company's exposure to such bonds.

As of March 31, 2021, the Company had $ 1 million of insured net par outstanding of PRASA obligations.

As of June 30, 2021, the Company had $ 1 million of insured net par outstanding of PRASA obligations.

The Company's insured PRASA obligations are secured by a lien on the gross revenues of the water and sewer system.

As of the date of this filing, all debt service payments on PRASA bonds insured by the Company have been made.

Puerto Rico Litigation

The Company believes that a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations it insures are illegal or unconstitutional or both, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

The Company has disagreed with a number of the actions taken by the Commonwealth, the FOMB and others with respect to obligations the Company insures, and has taken legal action, and may take additional legal action in the future, to enforce its rights with respect to these matters.

In addition, the Commonwealth, the FOMB and others have taken legal action naming the Company as party.

Currently, there are numerous legal actions relating to the default by the Commonwealth and certain of its entities on debt service payments, and related matters, and the Company is a party to a number of them.

On July 24, 2019, Judge Laura Taylor Swain of the United States District Court for the District of Puerto Rico (Federal District Court for Puerto Rico) held an omnibus hearing on litigation matters relating to the Commonwealth.

On July 24, 2019, Judge Laura

Taylor Swain of the United States District Court for the District of Puerto Rico (Federal District Court for Puerto Rico) held an omnibus hearing on litigation matters relating to the Commonwealth.

At that hearing, she imposed a stay through November 30, 2019 on a series of adversary proceedings and contested matters amongst the stakeholders and imposed mandatory mediation on all parties through that date.

On October 28, 2019, Judge Swain extended the stay until December 31, 2019, and has since stayed the proceedings pending the Court's determination on the Commonwealth's plan of adjustment.

The Company expects that the issues that remain relevant raised in several of the stayed proceedings commenced by the Company or the FOMB, either prior to or following the filing of petitions under Title III of PROMESA, to be addressed either in other subsequently filed adversary proceedings described below or in the proceedings to confirm the plans of adjustment for the Commonwealth, PRHTA or other instrumentalities of the Commonwealth.

The Company expects that the issues that remain relevant that were raised in several of the stayed proceedings commenced by the Company or the FOMB, either prior to or following the filing of petitions under Title III of PROMESA, will be addressed either in other subsequently filed adversary proceedings described below or in the proceedings to confirm the plans of adjustment for the Commonwealth, PRHTA or other instrumentalities of the Commonwealth.

Issues that the Company believes remain relevant from these earlier proceedings include (i) whether the clawback of certain excise taxes and revenues pledged to secure payment of bonds issued by PRHTA, PRCCDA and PRIFA should be invalidated, (ii) whether administrative rent claims of the PBA against the Commonwealth should be disallowed, (iii) whether certain later vintage Commonwealth general obligation bonds should be invalidated as having been issued in violation of the Puerto Rico constitutional debt limit, (iv) whether Commonwealth general obligation bonds are secured by consensual or statutory liens, and (v) the validity, enforceability and extent of security interests in PRHTA revenues securing PRHTA bonds.

One of the stayed proceedings concerns a PREPA RSA entered in 2015 and is no longer relevant in light of the PREPA RSA entered in by the FOMB, the Company and other parties in 2019.

One of the stayed proceedings concerns a PREPA RSA entered in 2015 that is no longer relevant in light of the PREPA RSA entered into by the FOMB, the Company and other parties in 2019.

For so long as the Company is a party to the Support Agreements, its participation as an adverse party to the FOMB in any PROMESA litigation is to be stayed, with the Company supporting the positions of the FOMB in seeking confirmation of the Commonwealth, PRCCDA and PRHTA plans of adjustment and the approval of the PREPA RSA so long as those plans of adjustment and the PREPA RSA conform to the respective requirements of the Support Agreements.

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Judge Swain extended the stay until December 31, 2019, and further extended the stay until March 11, 2020.

Pursuant to the request of AGM, AGC and the defendants, Judge Swain ordered on September 6, 2019 that the claims in this complaint be addressed in the Commonwealth plan confirmation process and be subject to her July 24, 2019 stay and mandatory mediation order and be addressed in the Commonwealth plan confirmation process.

Judge Swain postponed certain deadlines and hearings, including those related to the plan of adjustment, indefinitely as a result of the COVID-19 pandemic.

Judge Swain had postponed certain deadlines and hearings, including those related to the plan of adjustment, indefinitely as a result of the COVID-19 pandemic.

Pursuant to the court's order, the FOMB filed an updated status report on September 9, 2020, as well as a subsequent update on October 25, 2020, regarding the effects of the pandemic on the Commonwealth.

Subsequently, the court ordered the FOMB to file a further updated report by December 8, 2020 and, no later than February 10, 2021, an amended Commonwealth disclosure statement and plan of adjustment or, at a minimum, a term sheet outlining such amendments necessitated by the COVID-19 pandemic.

On February 10, 2021, the FOMB filed a motion to extend the deadline to March 8, 2021 given a recent preliminary agreement with creditors.

On March 8, 2021, the FOMB filed a disclosure statement and a second amended Commonwealth plan of adjustment intended to implement a Plan Support Agreement dated as of February 22, 2021, to which AGM and AGC had given their support conditioned on the Plan Support Agreement becoming part of a consensually negotiated and comprehensive solution that would include PRHTA and PRCCDA.

On May 5, 2021, the FOMB announced the execution of the Plan Support Agreement that includes PRHTA and PRCCDA.

February 10, 2021, the FOMB filed a motion to extend the deadline to March 8, 2021 given a recent preliminary agreement with creditors.

On March 8, 2021, the FOMB filed a disclosure statement and a second amended Commonwealth plan of adjustment intended to implement a PSA dated as of February 22, 2021, to which AGM and AGC had given their support conditioned on the PSA becoming part of a consensually negotiated and comprehensive solution that would include PRHTA and PRCCDA.

On May 5, 2021, the FOMB announced the execution of the PSA that includes PRHTA and PRCCDA.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, AGM and AGC along with certain other monoline insurers filed in Federal District Court for Puerto Rico a motion (amending and superseding a motion filed by AGM and AGC on August 23, 2019) for relief from the automatic stay imposed pursuant to Title III of PROMESA to permit AGM and AGC and the other moving parties to enforce in another forum the application of the revenues securing the PRHTA bonds (the PRHTA Revenues) or, in the alternative, for adequate protection for their property interests in PRHTA Revenues.

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On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021.

On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief.

The First Circuit did not rule on whether movants had a property interest, noting that issue was actively being adjudicated before the District Court, which will eventually decide on a final basis, and on a more developed record, whether the insurers have a property interest.

On March 3, 2021, the First Circuit issued an opinion, finding that the Federal District Court for Puerto Rico had not abused its discretion in denying lift stay relief.

The First Circuit did not rule on whether movants had a property interest, noting that issue was actively being adjudicated before the Federal District Court for Puerto Rico, which will eventually decide on a final basis, and on a more developed record, whether the insurers have a property interest.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the Commonwealth Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or property interests with respect to PRHTA Revenues.

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On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, the FOMB, on behalf of the PRHTA, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and other insurers of PRHTA bonds, objecting to the bond insurers claims in the PRHTA Title III proceedings and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRHTA Revenues .

This matter is stayed pending further order of the court.

securing the PRIFA Bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that AGM and AGC and the other moving parties can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for such parties’ lien on the PRIFA Revenues.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRIFA Rum Tax Bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRIFA Bonds (the PRIFA Revenues), seeking an order lifting the automatic stay so that AGM and AGC and the other moving parties can enforce rights respecting the PRIFA Revenues in another forum or, in the alternative, that the Commonwealth must provide adequate protection for such parties’ lien on the PRIFA Revenues.

A preliminary hearing on the motion occurred on June 4, 2020.

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On September 23, 2020, AGM and AGC filed a notice of appeal of this denial and the underlying determinations to the First Circuit, which held oral arguments on February 4, 2021.

On March 3, 2021, the First Circuit issued an opinion, finding that the District Court had not abused its discretion in denying lift stay relief.

On March 3, 2021, the First Circuit issued an opinion, finding that the Federal District Court for Puerto Rico had not abused its discretion in denying lift stay relief.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On July 27, 2021, certain other monoline insurers entered into the PRIFA PSA, and on July 28, 2021, AGC executed a joinder to the PRIFA PSA.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRIFA bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee, for lack of standing and for any assertions of secured status or ownership interests with respect to PRIFA Revenues.

Motions for partial summary judgment were filed on April 28, 2020, and a hearing was held on September 23, 2020.

On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

On January 20, 2021, Judge Swain ordered that certain

discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On July 27, 2021, certain other monoline insurers entered into a PRIFA Related Plan Support Agreement, and on July 28, 2021, AGC executed a joinder to the PRIFA Related Support Agreement.

On January 16, 2020, AGM and AGC along with certain other monoline insurers and the trustee for the PRCCDA bonds filed in Federal District Court for Puerto Rico a motion concerning application of the automatic stay to the revenues securing the PRCCDA bonds (the PRCCDA Revenues), seeking an order that an action to enforce rights respecting the PRCCDA Revenues in another forum is not subject to the automatic stay associated with the Commonwealth’s Title III proceeding or, in the alternative, if the court finds that the stay is applicable, lifting the automatic stay so that AGM, AGC and the other moving parties can enforce such rights in another forum or, in the further alternative, if the court finds the automatic stay applicable and does not lift it, that the Commonwealth must provide adequate protection for such parties’ lien on the PRCCDA Revenues.

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Pursuant to a memorandum issued on September 9, 2020, Judge Swain held that the final hearing with respect to the Transfer Account shall be deemed to have occurred when the court issues its final decisions in the PRCCDA Adversary Proceeding concerning the identity of the Transfer Account and the parties' respective rights in the alleged Transfer Account monies.

Following the final hearing with respect to the Transfer Account, AGM and AGC intend to appeal the portion of the opinion constituting a denial and the underlying determinations related to the denial to the First Circuit.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On January 16, 2020, the FOMB brought an adversary proceeding in the Federal District Court for Puerto Rico against AGC and other insurers of PRCCDA bonds, objecting to the bond insurers claims and seeking to disallow such claims, among other reasons, as being duplicative of the master claims filed by the trustee and for any assertions of secured status or property interests with respect to PRCCDA Revenues.

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On January 20, 2021, Judge Swain ordered that certain discovery identified by the insurers was appropriate prior to a determination on the partial summary judgment motion.

In light of the PSAs, on May 25, 2021, Judge Swain stayed the participation of AGM and AGC.

On June 26, 2021, the GDB Debt Recovery Authority, through its servicer and collateral monitor and as a holder of PRHTA subordinated debt, brought an adversary proceeding in the Federal District Court for Puerto Rico against AGM, AGC and others challenging the resolution of the PRHTA priority issues set forth in the HTA/CCDA PSA.

A response to the complaint is due August 27, 2021.

Puerto Rico Par and Debt Service Schedules

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Gross Par Outstanding Gross Debt Service Outstanding

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020

(in millions)

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Net Par Outstanding

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

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and Net Debt Service Outstanding

As of March 31, 2021

As of June 30, 2021

Scheduled Net Par Amortization Scheduled Net Debt Service Amortization

(in millions)

2021 (April 1 - June 30) $ — $ 3

2021 (July 1 - September 30) $ 152 $ 244

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Virgin Islands

As of March 31, 2021, the Company had $ 478 million insured net par outstanding to the U.S.

Virgin Islands and its related authorities (USVI), of which it rated $ 215 million BIG.

The $ 263 million USVI net par the Company rated investment grade primarily consisted of bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum.

The $ 215 million BIG USVI net par consisted of (a) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (b) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.

As of June 30, 2021, the Company had $ 478 million insured net par outstanding to the U.S.

Virgin Islands and its related authorities (USVI), of which it rated $ 474 million BIG (up from $ 215 million BIG last quarter).

The BIG USVI net par consisted of (a) bonds secured by a lien on matching fund revenues related to excise taxes on products produced in the USVI and exported to the U.S., primarily rum, (b) Public Finance Authority bonds secured by a gross receipts tax and the general obligation, full faith and credit pledge of the USVI and (c) bonds of the Virgin Islands Water and Power Authority secured by a net revenue pledge of the electric system.

In 2017, Hurricane Irma caused significant damage in St.

3 unchanged sentences

More recently, the COVID-19 pandemic and evolving governmental and private responses to the pandemic have been impacting the USVI economy, especially the tourism sector.

The USVI is benefiting from the federal response to the 2017 hurricanes and COVID-19 and has made its debt service payments to date.

The USVI is benefiting from the federal response to the 2017 hurricanes and COVID-19 and has made its debt service payments to date, but is experiencing fiscal pressure.

Specialty Insurance and Reinsurance Exposure

The Company also provides specialty insurance and reinsurance on transactions with risk profiles similar to those of its structured finance exposures written in financial guaranty form.

As of March 31, 2021 and December 31, 2020, $ 5 million and $ 13 million, respectively, of aircraft residual value insurance exposure was rated BIG.

As of June 30, 2021 and December 31, 2020, $ 5 million and $ 13 million, respectively, of aircraft residual value insurance exposure was rated BIG.

Specialty Insurance and Reinsurance

Gross Exposure Net Exposure

March 31, 2021 December 31, 2020 March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020 June 30, 2021 December 31, 2020

(in millions)

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The Company has sometimes exercised this option, which uses cash but reduces projected future losses.

The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and VIE).

The following tables present a roll forward of net expected loss to be paid (recovered) for all contracts under all accounting models (insurance, derivative and FG VIE).

The Company used risk-free rates for U.S.

dollar denominated obligations that ranged from 0.00 % to 2.49 % with a weighted average of 0.88 % as of March 31, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

dollar denominated obligations that ranged from 0.00 % to 2.14 % with a weighted average of 0.73 % as of June 30, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

Expected losses to be paid for transactions denominated in currencies other than the U.S.

dollar represented approximately 5.0 % and 6.8 % of the total as of March 31, 2021 and December 31, 2020, respectively.

dollar represented approximately 4.7 % and 6.8 % of the total as of June 30, 2021 and December 31, 2020, respectively.

Net Expected Loss to be Paid (Recovered)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Roll Forward by Sector

First Quarter 2021

Second Quarter 2021

Net Expected Loss to be Paid (Recovered) as of March 31, 2021 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid (Recovered) as of June 30, 2021

(in millions)

Public finance:

public finance $ 228 $ 1 $ ( 8 ) $ 221

public finance 24 ( 1 ) ( 1 ) 22

Public finance 252 — ( 9 ) 243

Structured finance:

RMBS 181 ( 28 ) 25 178

Other structured finance 39 8 ( 2 ) 45

Structured finance 220 ( 20 ) 23 223

Total $ 472 $ ( 20 ) $ 14 $ 466

Second Quarter 2020

Net Expected Loss to be Paid (Recovered) as of March 31, 2020 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid (Recovered) as of June 30, 2020

(in millions)

Public finance:

public finance $ 493 $ 30 $ 20 $ 543

public finance 26 2 1 29

Public finance 519 32 21 572

Structured finance:

RMBS 104 1 23 128

Other structured finance 37 1 ( 3 ) 35

Structured finance 141 2 20 163

Total $ 660 $ 34 $ 41 $ 735

Six Months 2021

Net Expected Loss to be Paid (Recovered) as of December 31, 2020 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid (Recovered) as of March 31, 2021

Net Expected Loss to be Paid (Recovered) as of June 30, 2021

(in millions)

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Total $ 529 $ ( 7 ) $ ( 56 ) $ 466

First Quarter 2020

Six Months 2020

Net Expected Loss to be Paid (Recovered) as of December 31, 2019 Economic Loss

Development (Benefit) (Paid)

Net Expected Loss to be Paid (Recovered) as of March 31, 2020

Net Expected Loss to be Paid (Recovered) as of June 30, 2020

(in millions)

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Such amounts are recorded as reinsurance recoverable on paid losses in other assets.

The tables above include (1) LAE paid of $ 4 million and $ 3 million for First Quarter 2021 and 2020, respectively, and (2) expected LAE to be paid of $ 19 million as of March 31, 2021 and $ 23 million as of December 31, 2020.

The tables above include (1) LAE paid of $ 6 million for both Second Quarter 2021 and 2020, and $ 10 million and $ 9 million for Six Months 2021 and 2020, respectively, and (2) expected LAE to be paid of $ 27 million as of June 30, 2021 and $ 23 million as of December 31, 2020.

Net Expected Loss to be Paid (Recovered) and

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Net Expected Loss to be Paid (Recovered) Net Economic Loss Development (Benefit)

As of First Quarter

March 31, 2021 December 31, 2020 2021 2020

As of Second Quarter Six Months

June 30, 2021 December 31, 2020 2021 2020 2021 2020

(in millions)

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Public Finance Transactions

The Company insured general obligation bonds of the Commonwealth of Puerto Rico and various obligations of its related authorities and public corporations aggregating $ 3.7 billion net par as of March 31, 2021, all of which was BIG.

For additional information regarding the Company's Puerto Rico exposure, see "Exposure to Puerto Rico" in Note 3, Outstanding Exposure.

On February 25, 2015, a plan of adjustment resolving the bankruptcy filing of the City of Stockton, California under chapter 9 of the Bankruptcy Code became effective.

As of March 31, 2021, the Company’s net par subject to the plan consisted of $ 104 million of pension obligation bonds.

As of June 30, 2021, the Company’s net par subject to the plan consisted of $ 104 million of pension obligation bonds.

As part of the plan of adjustment, the City will repay claims paid on the pension obligation bonds from certain fixed payments and certain variable payments contingent on the City’s revenue growth, which will likely be impacted by COVID-19.

The Company projects its total net expected loss across its troubled U.S.

public finance exposures as of March 31, 2021, including those mentioned above, to be $ 228 million, compared with a net expected loss of $ 305 million as of December 31, 2020.

The total net expected loss for troubled U.S.

public finance exposures is net of a credit for estimated future recoveries of claims already paid.

At March 31, 2021 that credit was $ 994 million compared with $ 1,154 million at December 31, 2020.

The Company’s net expected losses incorporate management’s probability weighted estimates of possible scenarios.

public finance exposures as of June 30, 2021, including those mentioned above, to be $ 221 million, compared with a net expected loss of $ 305 million as of December 31, 2020.

The Company’s net expected losses incorporate management’s probability weighted estimates of all possible scenarios.

The economic loss development for U.S.

public finance transactions was $ 15 million during First Quarter 2021, an d w as primarily attributable to Puerto Rico exposures.

The lo ss development attributable to the Company’s Puerto Rico ex posures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information as discussed under "Exposure to Puerto Rico" in Note 3, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.

public finance transactions was $ 1 million during Second Quarter 2021 and was primarily attributable to deterioration in a student housing transaction and changes in discount rates, which were partially offset by improvement in certain Puerto Rico exposures.

The economic loss development was $ 16 million during Six Months 2021, an d w as primarily attributable to Puerto Rico exposures and deterioration in a student housing transaction, which were partially offset by changes in discount rates and improved cash flows for a certain transaction.

The changes attributable to the Company’s Puerto Rico ex posures reflects adjustments the Company made to the assumptions it uses in its scenarios based on the public information as discussed under "Exposure to Puerto Rico" in Note 3, Outstanding Exposure as well as nonpublic information related to its loss mitigation activities during the period.

Selected Non - U.S.

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Expected loss to be paid for non-U.S.

public finance transactions was $ 24 million as of March 31, 2021, compared with $ 36 million as of December 31, 2020, primarily consisting of:

public finance transactions was $ 22 million as of June 30, 2021, compared with $ 36 million as of December 31, 2020, primarily consisting of:

(i) an obligation backed by the availability and toll revenues of a major arterial road, which has been underperforming due to higher costs compared with expectations at underwriting, and (ii) an obligation for which the Company has been paying claims because of the impact of negative Euro Interbank Offered Rate (Euribor) on the transaction.

The economic benefit for non-U.S.

public finance transactions, including those mentioned above, was approximately $ 12 million during First Quarter 2021, and was due to the restructuring of certain exposures and the impact of higher Euribor.

public finance transactions, including those mentioned above, was approximately $ 1 million during Second Quarter 2021.

The economic benefit was $ 13 million during Six Months 2021, and was due to the restructuring of certain exposures and the impact of higher Euribor.

RMBS Loss Projections

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The resulting projected claim payments or reimbursements are then discounted using risk-free rates.

The Company's RMBS loss projection methodology assumes that the housing and mortgage markets will improve.

Each period the Company makes a judgment as to whether to change the assumptions it uses to make RMBS loss projections based on its observation during the period of the performance of its insured transactions (including early-stage delinquencies, late-stage delinquencies and loss severity) as well as the residential property market and economy in general, and, to the extent it observes changes, it makes a judgment as to whether those changes are normal fluctuations or part of a trend.

1 unchanged sentence

Net Economic Loss Development (Benefit)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

3 unchanged sentences

RMBS ( 14 ) ( 3 ) ( 28 ) ( 7 )

As of March 31, 2021, the Company had a net R&W payable of $ 59 million to R&W counterparties, compared with a net R&W payable of $ 74 million as of December 31, 2020.

The Company’s agreements with providers of R&W generally provide for reimbursement to the Company as claim payments are made and, to the extent the Company later receives reimbursements of such claims from excess spread or other sources, for the Company to provide reimbursement to the R&W providers.

When the Company projects receiving more reimbursements in the future than it projects to pay in claims on transactions covered by R&W settlement agreements, the Company will have a net R&W payable.

First Lien RMBS Loss Projections:

First Lien U.S.

RMBS Loss Projections:

Alt-A First Lien, Option ARM, Subprime and Prime

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First Lien Liquidation Rates

March 31, 2021 December 31, 2020

June 30, 2021 March 31, 2021 December 31, 2020

Delinquent/Modified in the Previous 12 Months

21 unchanged sentences

Real Estate Owned

All 100 100 100

Towards the end of the first quarter of 2020, lenders began offering mortgage borrowers the option to forbear interest and principal payments of their loans due to the COVID -19 pandemic, and to repay such amounts at a later date.

This resulted in an increase in early-stage delinquencies in RMBS transactions during the second quarter of 2020 and late-stage delinquencies during the second half of 2020.

This resulted in an increase in early-stage delinquencies in RMBS transactions during Second Quarter 2020 and late-stage delinquencies during the second half of 2020.

Early stage delinquencies have recovered to pre-pandemic levels, but late stage delinquencies continue to be elevated as many borrowers remain on COVID-19 forbearance plans.

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Another important driver of loss projections is loss severity, which is the amount of loss the transaction incurs on a loan after the application of net proceeds from the disposal of the underlying property.

Loss severities experienced in first lien transactions had reached historically high levels, and the Company is assuming in the base case that the still elevated levels generally will continue for another 18 months.

Loss severities experienced in first lien transactions had reached historically high levels during the 2008 financial crisis, and the Company is assuming in the base case that the recent (still elevated) levels generally will continue for another 18 months.

The Company determines its initial loss severity based on actual recent experience.

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Key Assumptions in Base Case Expected Loss Estimates

First Lien RMBS

As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average

First Lien U.S.

As of June 30, 2021 As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average Range Weighted Average

Alt-A First Lien

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The current level of voluntary prepayments is assumed to continue for the plateau period before gradually increasing over 12 months to the final CPR, which is assumed to be 15 % in the base case.

For transactions where the initial

CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

For transactions where the initial CPR is higher than the final CPR, the initial CPR is held constant and the final CPR is not used.

These CPR assumptions are the same as those the Company used for December 31, 2020.

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The Company also stressed CPR and the speed of recovery of loss severity rates.

The Company probability weighted a total of five scenarios as of March 31, 2021 and December 31, 2020.

The Company probability weighted a total of five scenarios as of June 30, 2021 and December 31, 2020.

Total expected loss to be paid on all first lien U.S.

RMBS was $ 166 million and $ 133 million as of March 31, 2021 and December 31, 2020, respectively.

The $ 25 million econo mic loss development in First Quarter 2021 for first lien U.S.

RMBS was prima rily attributable to lower excess spread of $ 53 million, partially offset by changes in discount rates of $ 26 million Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt lin ked to LIBOR, which inreased in First Quarter 2021, and so decreased excess spread.

The Company used a similar approach to establish its pessimistic and optimistic scenarios as of March 31, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case.

LIBOR may be discontinued, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio refer encing LIBOR.

RMBS was $ 160 million and $ 133 million as of June 30, 2021 and December 31, 2020, respectively.

The $ 14 million economic benefit in Second Quarter 2021 for first lien U.S.

RMBS transactions was primarily attributable to higher excess spread in certain transactions, partially offset by changes in discount rates.

The $ 11 million economic loss development in Six Months 2021 for first lien U.S.

RMBS was prima rily attributable to lower excess spread, partially offset by changes in discount rates.

Certain transactions benefit from excess spread when they are supported by large portions of fixed rate assets (either originally fixed or modified to be fixed) but have insured floating rate debt lin ked to LIBOR.

An increase in projected LIBOR decreases excess spread, while lower LIBOR results in higher excess spread.

The Company used a similar approach to establish its pessimistic and optimistic scenarios as of June 30, 2021 as it used as of December 31, 2020, increasing and decreasing the periods of stress from those used in the base case.

LIBOR is anticipated to be discontinued after June 30, 2023, and it is not yet clear how this will impact the calculation of the various interest rates in this portfolio refer encing LIBOR.

In the Company's most stressful scenario where loss severities were assumed to rise and then recover over nine years and the initial ramp-down of the CDR was assumed to occur over 15 months, expected loss to be paid would increase from current projections by approximately $ 32 million for all first lien U.S.

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RMBS transactions.

Second Lien RMBS Loss Projections

Second Lien U.S.

RMBS Loss Projections

Second lien RMBS transactions include both home equity lines of credit (HELOC) and closed end second lien mortgages.

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As in the case of first lien transactions, second lien transactions have seen an increase in delinquencies because of COVID-19 related forbearances.

The Company applies a 20 % liquidation rate to such forborn loans, same as in first lien RMBS transactions.

The Company applies a 20 % liquidation rate to such forborne loans, the same as in first lien RMBS transactions.

Similar to first liens, the Company then calculates a CDR for six months , which is the period over which the currently delinquent collateral is expected to be liquidated.

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This causes the borrower's total monthly payment to increase, sometimes substantially, at the end of the initial interest-only period.

In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization

period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

The HELOC loans underlying the Company's insured HELOC transactions are now past their original interest-only reset date, although a significant number of HELOC loans were modified to extend the original interest-only period for another five years .

In the prior periods, as the HELOC loans underlying the Company's insured HELOC transactions reached their principal amortization period, the Company incorporated an assumption that a percentage of loans reaching their principal amortization periods would default around the time of the payment increase.

The Company does not apply a CDR increase when such loans are projected to reach their principal amortization period due to the likelihood that those loans will either prepay or once again have their interest-only periods extended.

As a result, the Company does not apply a CDR increase when such loans reach their principal amortization period.

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When a second lien loan defaults, there is generally a low recovery.

The Company assumed, as of March 31, 2021 and December 31, 2020, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time.

The Company assumed, as of June 30, 2021 and December 31, 2020, that it will generally recover 2 % of future defaulting collateral at the time of charge-off, with additional amounts of post charge-off recoveries projected to come in over time.

A second lien on the borrower’s home may be retained in the Company's second lien transactions after the loan is charged off and the loss applied to the transaction, particularly in cases where the holder of the first lien has not foreclosed.

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Such recoveries are assumed to be received evenly over the next five years .

Increasing the recovery rate to 30 % would result in an economic benefit of $ 47 million, while decreasing the recovery rate to 10 % would result in an economic loss of $ 47 million.

If the recovery rate was increased to 30 %, expected loss to be paid would decrease from current projections by approximately $ 45 million.

If the recovery rate was decreased to 10 % expected loss to be paid would increase from current projections by approximately $ 45 million.

The rate at which the principal amount of loans is prepaid may impact both the amount of losses projected as well as the amount of excess spread.

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Total expected loss to be paid on all second lien U.S.

RMBS was $ 15 million as of March 31, 2021 and $ 15 million as of December 31, 2020.

The $ 14 million economic benefit in First Quarter 2021 was primarily attributable to a $ 13 million benefit related to improved performance in certain transactions and higher actual recoveries received for previously charged-off loans, and an $ 8 million benefit related to changes in discount rates, partially offset by lower excess spread of $ 6 million.

RMBS was $ 18 million as of June 30, 2021 and $ 15 million as of December 31, 2020.

The $ 14 million economic benefit in Second Quarter 2021 and $ 28 million economic benefit in Six Months 2021 were primarily attributable to improved performance in certain transactions and higher actual recoveries received for previously charged-off loans.

The following table shows the range as well as the average, weighted by net par outstanding, for key assumptions used in the calculation of expected loss to be paid (recovered) for individual transactions for vintage 2004 - 2008 HELOCs.

Key Assumptions in Base Case Expected Loss Estimates

As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average

As of June 30, 2021 As of March 31, 2021 As of December 31, 2020

Range Weighted Average Range Weighted Average Range Weighted Average

Plateau CDR 3.5 % - 29.7 % 13.1 % 3.9 % - 30.6 % 12.8 % 5.0 % - 36.2 % 12.9 %

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The Company projected that its total net expected loss across its troubled non-U.S.

RMBS structured finance exposures as of March 31, 2021 was $ 39 million and was primarily attributable to student loan securitizations issued by private issuers with $ 66 million in BIG net par outstanding.

RMBS structured finance exposures as of June 30, 2021 was $ 45 million and was primarily attributable to student loan securitizations issued by private issuers with $ 63 million in BIG net par outstanding.

In general, the projected losses of these transactions are due to:

(i) the poor credit performance of private student loan collateral and high loss severities, or (ii) high interest rates on auction rate securities with respect to which the auctions have failed.

The Company also had exposure to troubled life insurance transactions with BIG net par of $ 40 million as of March 31, 2021.

The economic benefit ac ross all non-U.S.

RMBS structured finance transactions during First Quarter 2021 was $ 1 million.

The Company also had exposure to troubled life insurance transactions with BIG net par of $ 40 million as of June 30, 2021.

The economic loss development ac ross all non-U.S.

RMBS structured finance transactions during Second Quarter 2021 and Six Months 2021 was $ 8 million and $ 7 million, respectively, which was primarily attributable to LAE for certain transactions.

Recovery Litigation

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Net Earned Premiums

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

Financial guaranty:

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___________________

(1) Excludes $ 1 million for both First Quarter 2021 and 2020, related to consolidated FG VIEs.

(1) Excludes $ 1 million for both Second Quarter 2021 and 2020, and $ 2 million for both Six Months 2021 and 2020, related to consolidated FG VIEs.

Gross Premium Receivable,

Net of Commissions on Assumed Business

First Quarter

(in millions)

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Specialty insurance premium receivable 1 1

March 31, $ 1,359 $ 1,233

June 30, $ 1,373 $ 1,294

____________________

(1) Excludes $ 6 million and $ 7 million as of March 31, 2021 and March 31, 2020, respectively, related to consolidated FG VIEs.

Approximately 79 % and 80 % of gross premiums receivable, net of commissions at March 31, 2021 and December 31, 2020, respectively, are denominated in currencies other than the U.S.

(1) Excludes $ 6 million for both June 30, 2021 and June 30, 2020 related to consolidated FG VIEs.

Approximately 79 % and 80 % of gross premiums receivable, net of commissions at June 30, 2021 and December 31, 2020, respectively, are denominated in currencies other than the U.S.

dollar, primarily the pound sterling and euro.

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(Undiscounted)

As of March 31, 2021

As of June 30, 2021

(in millions)

2021 (April 1 - June 30) $ 43

2021 (July 1 - September 30) $ 48

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Scheduled Financial Guaranty Insurance Net Earned Premiums

As of March 31, 2021

As of June 30, 2021

(in millions)

2021 (April 1 - June 30) $ 81

2021 (July 1 - September 30) $ 80

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Policies with Premiums Paid in Installments

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(dollars in millions)

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Loss reserves are discounted at risk-free rates for U.S.

dollar denominated financial guaranty insurance obligations that ranged from 0.00 % to 2.49 % with a weighted average of 0.88 % as of March 31, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

The following table provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

Net Reserve (Salvage)

March 31, 2021 December 31, 2020

dollar denominated financial guaranty insurance obligations that ranged from 0.00 % to 2.14 % with a weighted average of 0.73 % as of June 30, 2021 and 0.00 % to 1.72 % with a weighted average of 0.60 % as of December 31, 2020.

The following tables provides information on net reserve (salvage), which includes loss and LAE reserves and salvage and subrogation recoverable, both net of reinsurance.

Net Reserve (Salvage) by Sector

June 30, 2021 December 31, 2020

(in millions)

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Structured finance 21 ( 18 )

Other payable (recoverables) ( 1 ) —

Total $ 87 $ 122

____________________

(1) Excludes net reserves of $ 29 million and $ 32 million as of March 31, 2021 and December 31, 2020, respectively, related to consolidated FG VIEs.

(1) Excludes net reserves of $ 28 million and $ 32 million as of June 30, 2021 and December 31, 2020, respectively, related to consolidated FG VIEs.

Components of Net Reserves (Salvage)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

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Salvage and subrogation reinsurance payable (2) 15 33

Other payable (recoveries) (1) ( 1 ) —

Salvage and subrogation recoverable, net and other recoverable ( 971 ) ( 958 )

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Expected loss to be paid (recovered) for financial guaranty insurance contracts differs from expected loss to be expensed due to:

(i) the contra-paid which represents the claim payments made and recoveries received that have not yet been recognized in the statement of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

(i) the contra-paid, which represents the claim payments made and recoveries received that have not yet been recognized in the statements of operations, (ii) salvage and subrogation recoverable for transactions that are in a net recovery position where the Company has not yet received recoveries on claims previously paid (and therefore recognized in income but not yet received), and (iii) loss reserves that have already been established (and therefore expensed but not yet paid).

Reconciliation of Net Expected Loss to be Paid (Recovered) and

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Financial Guaranty Insurance Contracts

As of March 31, 2021

As of June 30, 2021

(in millions)

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____________________

(1) Excludes $ 28 million as of March 31, 2021 related to consolidated FG VIEs.

(1) Excludes $ 28 million as of June 30, 2021 related to consolidated FG VIEs.

The following table provides a schedule of the expected timing of net expected losses to be expensed.

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Financial Guaranty Insurance Contracts

As of March 31, 2021

As of June 30, 2021

(in millions)

2021 (April 1 - June 30) $ 7

2021 (July 1 - September 30) $ 8

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Loss (Benefit)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

Public finance:

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Loss and LAE $ ( 16 ) $ 37 $ 14 $ 57

Second Quarter

____________________

(1) Excludes a benefit of $ 3 million and a loss of $ 6 million for First Quarter 2021 and 2020 respectively, related to consolidated FG VIEs.

(1) Excludes a benefit of $ 2 million and a loss of $ 2 million for Second Quarter 2021 and 2020, respectively, and a benefit of $ 5 million and a loss of $ 8 million for Six Months 2021 and 2020, respectively, related to consolidated FG VIEs.

The following tables provide information on financial guaranty insurance contracts categorized as BIG.

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BIG Transaction Loss Summary

As of March 31, 2021

As of June 30, 2021

BIG Categories

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The components of the Company’s credit derivative net par outstanding are presented in the table below.

The estimated remaining weighted average life of credit derivatives was 12.0 years and 11.9 years as of March 31, 2021 and December 31, 2020, respectively.

The estimated remaining weighted average life of credit derivatives was 12.5 years and 11.9 years as of June 30, 2021 and December 31, 2020, respectively.

Credit Derivatives (1)

As of March 31, 2021 As of December 31, 2020

As of June 30, 2021 As of December 31, 2020

Outstanding Net Fair Value Asset (Liability) Net Par

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____________________

(1) Expected loss to be paid was $ 2 million as of March 31, 2021 and expected recoveries were $ 1 million as of December 31, 2020.

(1) Expected loss to be paid was $ 8 million as of June 30, 2021 and expected recoveries were $ 1 million as of December 31, 2020.

Distribution of Credit Derivative Net Par Outstanding by Internal Rating

As of March 31, 2021 As of December 31, 2020

As of June 30, 2021 As of December 31, 2020

Ratings Net Par

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Net Change in Fair Value of Credit Derivative Gains (Losses)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Net change in fair value of credit derivatives $ ( 33 ) $ 100 $ ( 52 ) $ 23

During First Quarter 2021, unrealized fair value losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC's credit protection decreased during the period.

For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company would expect to receive on these transactions increased.

The unrealized fair value losses were partially offset by higher discount rates.

During First Quarter 2020, unrealized fair value losses were generated primarily as a result of wider spreads of the underlying collateral and lower discount rates.

These were partially offset by gains due to the increased cost to buy protection on AGC, as the market cost of AGC's credit protection increased during the period.

During Second Quarter 2021, unrealized losses were generated primarily as a result of the decreased cost to buy protection on AGC, as the market cost of AGC's credit protection decreased during the period.

These losses were partially offset by general price improvements of the underlying collateral.

For those CDS transactions that were pricing at or above their floor levels, when the cost of purchasing CDS protection on AGC, which management refers to as the CDS spread on AGC, decreased, the implied spreads that the Company (or another comparable entity) would expect to receive on these transactions increased.

During Second Quarter 2020, unrealized gains were generated primarily as a result of price improvements of the

underlying collateral.

These gains were partially offset by losses due to the decreased cost to buy protection on AGC, as the

market cost of AGC's credit protection decreased during the period.

During Six Months 2021 unrealized losses were generated primarily as a result of wider implied net spreads driven by the decreased market cost to buy protection in AGC’s name during the period.

These losses were partially offset by general asset price improvement of the underlying collateral.

During Six Months 2020, unrealized gains were generated primarily as a result of the increased cost to buy protection

on AGC, as the market cost of AGC's credit protection increased during the period.

These gains were partially offset by the

wider spreads of the underlying collateral and lower discount rates.

The impact of changes in credit spreads will vary based upon the volume, tenor, interest rates, and other market conditions at the time these fair values are determined.

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CDS Spread on AGC (in basis points)

As of March 31, 2021 As of December 31, 2020 As of March 31, 2020 As of December 31, 2019

As of June 30, 2021 As of March 31, 2021 As of December 31, 2020 As of June 30, 2020 As of March 31, 2020 As of December 31, 2019

Five-year CDS spread 62 97 132 159 224 41

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Credit Spread

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

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Net fair value of credit derivatives $ ( 154 ) $ ( 100 )

The fair value of CDS contracts at March 31, 2021, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wide credit spreads generally due to relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.

The fair value of CDS contracts at June 30, 2021, before considering the benefit applicable to AGC’s credit spread, is a direct result of the relatively wider credit spreads under current market conditions compared to those at the time of underwriting for certain underlying credits with longer tenor.

Collateral Posting for Certain Credit Derivative Contracts

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eligible collateral other than cash is valued at a discount to the face amount.

As of March 31, 2021, AGC did not need to post collateral to satisfy these requirements.

As of June 30, 2021, the Company did not need to post collateral to satisfy these requirements.

The Company assumes exposure (Assumed Business) from third-party insurers, primarily other monoline financial guaranty companies that currently are in runoff and no longer actively writing new business (Legacy Monoline Insurers), and may cede portions of exposure it has insured (Ceded Business) in exchange for premiums, net of any ceding commissions.

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Substantially all of the Company’s Assumed Business and Ceded Business relates to financial guaranty business, except for a modest amount that relates to AGRO's specialty business.

The Company historically entered into, and with respect to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

The Company historically entered into, and with respect

to new business originated by AGRO continues to enter into, ceded reinsurance contracts in order to obtain greater business diversification and reduce the net potential loss from large risks.

The Company has ceded financial guaranty business to non-affiliated companies to limit its exposure to risk.

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The following table presents the components of premiums and losses reported in the condensed consolidated statements of operations and the contribution of the Company's Assumed and Ceded Businesses (both financial guaranty and specialty).

Effect of Reinsurance on Statement of Operations

First Quarter

Effect of Reinsurance on Condensed Consolidated Statements of Operations

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

Premiums Written:

Direct $ 82 $ 148 $ 159 $ 212

Assumed 2 1 12 1

Ceded (1) 1 2 — 2

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Direct $ 94 $ 113 $ 190 $ 207

Assumed 8 10 16 20

Ceded — ( 2 ) ( 1 ) ( 3 )

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Net $ ( 16 ) $ 37 $ 14 $ 57

____________________

(1) Positive ceded premiums written were due to commutations and changes in expected debt service schedules.

Ceded Reinsurance (1)

As of March 31, 2021 As of December 31, 2020

As of June 30, 2021 As of December 31, 2020

(in millions)

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____________________

(1) The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of both March 31, 2021 and December 31, 2020 was approximately $ 18 million.

(1) The total collateral posted by all non-affiliated reinsurers required to post, or that had agreed to post, collateral as of both June 30, 2021 and December 31, 2020 was approximately $ 18 million.

Such collateral is posted (i) in the case of certain reinsurers not authorized or "accredited" in the U.S., in order for the Company to receive credit for the liabilities ceded to such reinsurers in statutory financial statements, and (ii) in the case of certain reinsurers authorized in the U.S., on terms negotiated with the Company.

(2) Of the total par ceded to BIG rated reinsurers, $ 74 million was rated BIG as of both March 31, 2021 and December 31, 2020.

(2) Of the total par ceded to BIG rated reinsurers, $ 74 million was rated BIG as of both June 30, 2021 and December 31, 2020.

In Second Quarter 2020 and Six Months 2020, the Company reassumed $ 336 million in par, including $ 118 million in net par of Puerto Rico exposures, from its largest remaining legacy third-party financial guaranty reinsurer.

This commutation resulted in an increase of unearned premium reserve of $ 5 million and a commutation gain of $ 38 million.

Investments and Cash

1 unchanged sentence

The investment portfolio tables shown below include assets managed both externally and internally.

As of March 31, 2021, the majority of the investment portfolio is managed by three outside managers and AssuredIM.

As of June 30, 2021, the majority of the investment portfolio is managed by three outside managers and AssuredIM.

The Company has established detailed guidelines regarding credit quality, exposure to a particular sector and exposure to a particular obligor within a sector.

1 unchanged sentence

(Moody’s) or Fitch Ratings Inc., respectively.

The internally managed portfolio primarily consists of the Company's investments in (i) securities acquired for loss mitigation purposes or other risk management purposes, (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM, and (iii) other invested assets which primarily consist of alternative investments such as:

The internally managed portfolio primarily consists of the Company's investments in (i) securities acquired for loss mitigation purposes, (ii) securities managed under an Investment Management Agreement (IMA) with AssuredIM, (iii) other fixed-maturity securities, and (iv) other invested assets which primarily consist of alternative investments including:

an equity method investment in one AssuredIM Fund (a healthcare private equity fund) that is not consolidated, an investment in renewable and clean energy, and a private equity fund managed by a third party.

In addition to amounts shown in the table below, the Company agreed to purchase up to $ 125 million of limited partnership interests in certain of these and other similar investments, of which $ 91 million was not yet funded as of March 31, 2021.

The Company had unfunded commitments of $ 92 million as of June 30, 2021 related to certain limited partnership interests and other similar investments managed by third parties.

Investment Portfolio

Carrying Value

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

1 unchanged sentence

Externally managed $ 7,352 $ 7,301

Internally managed:

Loss mitigation and other securities (2) 922 925

AssuredIM 541 547

Loss mitigation securities 699 690

AssuredIM managed 561 547

Other 207 235

Short-term investments 1,087 851

Other invested assets (internally managed)

Other invested assets

Equity method investments - AssuredIM Funds 90 91

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____________________

(1) 8.2 % and 8.1 % of fixed-maturity securities, related primarily to loss mitigation and other risk management strategies, were rated BIG as of March 31, 2021 and December 31, 2020, respectively.

(2) Includes other fixed-maturities that were obtained or purchased as part of negotiated settlements with insured counterparties or under the terms of the financial guaranties (other risk management securities).

(1) 7.8 % and 8.1 % of fixed-maturity securities, related primarily to loss mitigation and other risk management strategies, were rated BIG as of June 30, 2021 and December 31, 2020, respectively.

Insurance Subsidiaries, through their jointly owned investment subsidiary, AGAS, are authorized to invest up to $ 750 million in AssuredIM Funds.

As of March 31, 2021, the Insurance segment has total commitments to AssuredIM Funds of $ 587 million of which $ 335 million represents net invested capital and $ 252 million is undrawn.

As of June 30, 2021, the Insurance segment had total commitments to AssuredIM Funds of $ 587 million of which $ 366 million represented net invested capital and $ 221 million was undrawn.

This capital was committed to several funds, each dedicated to a single strategy, including CLOs, asset-based finance, healthcare structured capital and municipal bonds.

As of March 31, 2021 and December 31, 2020, the fair value of AGAS’s interest in AssuredIM Funds, was $ 368 million and $ 345 million, respectively, although such amounts are not shown on the consolidated balance sheet in the investment portfolio if the AssuredIM Fund is consolidated.

The Insurance segment presents AGAS's investment in AssuredIM Funds in equity in earnings of investees, regardless of whether or not such AssuredIM Funds are consolidated.

AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not included in the "investment portfolio" line item on the condensed consolidated balance sheet, but rather, such AssuredIM Funds are consolidated and their assets and liabilities are presented in the line items “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable non-controlling interests.

Changes in the fair value of CIVs are also presented in their own line item on the condensed consolidated statement of operations with the portion not owned by AGAS and other subsidiaries presented as non-controlling interests.

As of June 30, 2021 and December 31, 2020, the fair value of AGAS’s interest in AssuredIM Funds, was $ 433 million and $ 345 million, respectively, although such amounts are not shown on the consolidated balance sheet in the investment portfolio if the AssuredIM Fund is consolidated.

All, but one, of the AssuredIM Funds in which AGAS invests are consolidated.

The Insurance segment presents equity in earnings of investees attributable to AGAS's interest in AssuredIM Funds, regardless of whether or not such AssuredIM Funds are consolidated.

AssuredIM Funds, in which AGAS (primarily) and other subsidiaries invest, and where the Company has been deemed to be the primary beneficiary, are not included in the "investment portfolio" line item on the condensed consolidated balance sheets, but rather, such AssuredIM Funds are consolidated and included in the line items “assets of consolidated investment vehicles” and “liabilities of consolidated investment vehicles”, with the portion not owned by AGAS and other subsidiaries presented as either redeemable or non-redeemable non-controlling interests.

Changes in the fair value of CIVs are also presented in their own line item on the condensed consolidated statements of operations with the portion not owned by AGAS and other subsidiaries presented as non-controlling interests.

See Note 9, Variable Interest Entities.

Accrued investment income, which is recorded in other assets, was $ 77 million as of March 31, 2021 and $ 75 million December 31, 2020.

In First Quarter 2021 and First Quarter 2020, the Company did not write off any accrued investment income.

Accrued investment income, which is recorded in other assets, was $ 73 million as of June 30, 2021 and $ 75 million as of December 31, 2020.

In Six Months 2021 and Six Months 2020, the Company did not write off any accrued investment income.

Fixed-Maturity Securities and Short-Term Investments

by Security Type

As of March 31, 2021

As of June 30, 2021

Security Type Percent

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Mortgage-backed securities (4):

RMBS 6 541 ( 20 ) 29 ( 20 ) 530 ( 19 ) A-

RMBS 5 514 ( 19 ) 29 ( 12 ) 512 ( 12 ) BBB+

Commercial mortgage-backed securities (CMBS) 4 338 — 22 — 360 — AAA

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The Company’s portfolio primarily consists of high-quality, liquid instruments.

government-agency obligations were approximately 34 % of mortgage backed securities as of March 31, 2021 and 35 % as of December 31, 2020 based on fair value.

government-agency obligations were approximately 33 % of mortgage-backed securities as of June 30, 2021 and 35 % as of December 31, 2020 based on fair value.

Fixed-Maturity Securities

1 unchanged sentence

For Which an Allowance for Credit Loss was Not Recorded

As of March 31, 2021

As of June 30, 2021

Less than 12 months 12 months or more Total

8 unchanged sentences

RMBS 8 — 7 — 15 —

CMBS 6 — — — 6 —

Asset-backed securities:

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The Company considered the credit quality, cash flows, interest rate movements, ability to hold a security to recovery and intent to sell a security in determining whether a security had a credit loss.

The Company has determined that the unrealized losses recorded as of March 31, 2021 were not related to credit quality.

The Company has determined that the unrealized losses recorded as of June 30, 2021 were not related to credit quality.

In addition, the Company currently does not intend to and is not required to sell investments in an unrealized loss position prior to expected recovery in value.

Of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 11 securities had unrealized losses in excess of 10% of their carrying value as of both March 31, 2021 and December 31, 2020.

The total unrealized loss for these securities was $ 9 million as of March 31, 2021 and $ 8 million as of December 31, 2020.

The amortized cost and estimated fair value of available-for-sale fixed maturity securities by contractual maturity as of March 31, 2021 are shown below.

As of June 30, 2021, of the securities in an unrealized loss position for which an allowance for credit loss was not recorded, 14

securities had unrealized losses in excess of 10% of their carrying value, whereas as of December 31, 2020, 11 securities had unrealized losses in excess of 10% of their carrying value.

The total unrealized loss for these securities was $ 8 million as of both June 30, 2021 and December 31, 2020.

The amortized cost and estimated fair value of available-for-sale fixed-maturity securities by contractual maturity as of June 30, 2021 are shown below.

Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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by Contractual Maturity

As of March 31, 2021

As of June 30, 2021

Cost Estimated

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Total $ 8,266 $ 8,819

Based on fair value, investments and other assets that are either held in trust for the benefit of third party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted totaled $ 257 million and $ 262 million, as of March 31, 2021 and December 31, 2020, respectively.

The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements in the amount of $ 1,271 million and $ 1,511 million, based on fair value as of March 31, 2021 and December 31, 2020, respectively.

Based on fair value, investments and other assets that are either held in trust for the benefit of third-party ceding insurers in accordance with statutory requirements, placed on deposit to fulfill state licensing requirements, or otherwise pledged or restricted, totaled $ 264 million as of June 30, 2021 and $ 262 million as of December 31, 2020.

The investment portfolio also contains securities that are held in trust by certain AGL subsidiaries or otherwise restricted for the benefit of other AGL subsidiaries in accordance with statutory and regulatory requirements, in the amount of $ 1,241 million and $ 1,511 million, based on fair value as of June 30, 2021 and December 31, 2020, respectively.

Net Investment Income and Equity in Earnings of Investees

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and Equity in Earnings of Investees

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

Interest income:

Externally managed $ 51 $ 62

Internally managed:

AssuredIM (1) 4 —

Loss mitigation and other securities 16 20

Externally managed fixed-maturity securities $ 52 $ 62 $ 103 $ 124

Loss mitigation securities 10 12 20 25

AssuredIM managed fixed-maturity securities (1) 4 1 8 1

Other 4 5 10 12

Interest income 70 80 141 162

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Net Realized Investment Gains (Losses)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Gross realized losses on available-for-sale securities ( 2 ) ( 8 ) ( 4 ) ( 9 )

Credit impairment and intent to sell (1) ( 4 ) ( 11 )

Change in credit impairment and intent to sell (1) — ( 4 ) ( 4 ) ( 15 )

Net realized investment gains (losses) (2) $ 4 $ 4 $ 1 $ ( 1 )

____________________

(1) Credit impairment in First Quarter 2021 and First Quarter 2020 was related primarily to an increase in the allowance for credit loss on loss mitigation securities.

Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in First Quarter 2020.

(2) Includes foreign currency gains of $ 1 million and $ 3 million for First Quarter 2021 and First Quarter 2020, respectively.

(1) Change in credit impairment in all periods was related primarily to the allowance for credit loss on loss mitigation securities.

Shut-downs due to COVID-19 pandemic restrictions contributed to the increase in the allowance for credit losses in Six Months 2020.

(2) Includes foreign currency gains of $ 1 million in Second Quarter 2021, $ 2 million in Six Months 2021 and $ 1 million for Six Months 2020, and foreign currency losses of $ 2 million in Second Quarter 2020.

The proceeds from sales of fixed-maturity securities classified as available-for-sale were $ 106 million in Second Quarter 2021, $ 404 million in Second Quarter 2020, $ 226 million in Six Months 2021 and $ 490 million in Six Months 2020.

The following table presents the roll forward of the credit losses on fixed-maturity securities for which the Company has recognized an allowance for credit losses in 2021 and 2020.

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in the Investment Portfolio

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Additions for securities for which credit impairments were not previously recognized — — 1 1

Reductions for securities sold and other settlements (1) ( 42 ) ( 1 ) ( 42 ) ( 1 )

Additions (reductions) for credit losses on securities for which credit impairments were previously recognized — 3 2 13

Balance, end of period $ 39 $ 75 $ 39 $ 75

The Company recorded an additional $ 3 million and $ 11 million in credit loss expense for First Quarter 2021 and First Quarter 2020, respectively.

Credit loss expense included accretion of $ 1 million and $ 1 million in First Quarter 2021 and First Quarter 2020, respectively.

____________________

(1) Primarily attributable to the sale of a security with a $ 42 million credit allowance in Second Quarter 2021 and Six Months 2021.

The company recorded an additional $ 3 million, $ 3 million and $ 14 million in credit loss expense for Second Quarter 2020, Six Months 2021 and Six Months 2020, respectively.

The credit loss was de minimis in Second Quarter 2021.

Credit loss expense included accretion of $ 1 million in Second Quarter 2021 and Second Quarter 2020 and $ 2 million in Six Months 2021 and Six Months 2020.

The Company did not purchase any securities with credit deterioration during the periods presented.

All of the Company’s securities that were purchased with credit deterioration are loss mitigation or other risk management securities.

Most of the Company’s securities with credit deterioration are loss mitigation or other risk management securities.

Variable Interest Entities

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The insurance subsidiaries provide financial guaranties with respect to debt obligations of special purpose entities, including VIEs, but do not act as the servicer or collateral manager for any VIE obligations they guarantee.

The transaction structure generally provides certain financial protections to the insurance subsidiaries.

The transaction structure generally provides certain financial protection to the insurance subsidiaries.

This financial protection can take several forms, the most common of which are overcollateralization, first loss protection (or subordination) and excess spread.

In the case of overcollateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the structured finance obligations), the structure allows defaults of the securitized assets before a default is experienced on the structured finance obligation guaranteed by the Company.

In the case of first loss, the Company's financial guaranty insurance policy only

covers a senior layer of losses experienced by multiple obligations issued by the VIEs.

In the case of first loss, the insurance subsidiaries' financial guaranty insurance policy only covers a senior layer of losses experienced by multiple obligations issued by the VIEs.

The first loss exposure with respect to the assets is either retained by the seller or sold off in the form of equity or mezzanine debt to other investors.

In the case of excess spread, the financial assets contributed to VIEs, generate interest income that are in excess of the interest payments on the debt issued by the VIE.

In the case of excess spread, the financial assets contributed to VIEs generate interest income that is in excess of the interest payments on the debt issued by the VIE.

Such excess spread is typically distributed through the transaction’s cash flow waterfall and may be used to create additional credit enhancement, applied to redeem debt issued by the VIE (thereby, creating additional overcollateralization), or distributed to equity or other investors in the transaction.

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If the protective rights that could make the insurance subsidiaries the control party have not been triggered, then the VIE is not consolidated.

If the insurance companies are deemed no longer to have those protective rights, the VIE is deconsolidated.

If the insurance subsidiaries are deemed no longer to have those protective rights, the VIE is deconsolidated.

The FG VIEs’ liabilities that are guaranteed by the insurance subsidiaries are considered to be with recourse, because

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principal and interest of these liabilities is wholly dependent on the performance of the FG VIEs’ assets.

As of both March 31, 2021 and December 31, 2020, the Company consolidated 25 FG VIEs.

During First Quarter 2020 there was one FG VIE that matured.

As of June 30, 2021 and December 31, 2020, the Company consolidated 24 and 25 FG VIEs, respectively.

During Six Months 2021 there was one FG VIE that was deconsolidated.

During Six Months 2020 there were two FG VIEs that matured and two FG VIEs that were consolidated.

There were no other consolidations or deconsolidations for the periods presented.

Net loss on consolidation was $ 1 million in Second Quarter 2020 and Six Months 2020 and was recorded in other income.

The table below shows the carrying value of the consolidated FG VIEs’ assets and liabilities in the condensed consolidated financial statements, segregated by the types of assets that collateralize the respective debt obligations for FG VIEs’ liabilities with recourse.

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By Type of Collateral

As of March 31, 2021 As of December 31, 2020

As of June 30, 2021 As of December 31, 2020

Assets Liabilities Assets Liabilities

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Total $ 287 $ 320 $ 296 $ 333

The change in the instrument-specific credit risk (ISCR) of the FG VIEs’ assets held as of March 31, 2021 that was recorded in the condensed consolidated statements of operations for First Quarter 2021 was a loss of $ 3 million.

The change in the ISCR of the FG VIEs’ assets held as of March 31, 2020 was a loss of $ 3 million for First Quarter 2020.

The change in the instrument-specific credit risk (ISCR) of the FG VIEs’ assets held as of June 30, 2021 that was recorded in the condensed consolidated statements of operations for Second Quarter 2021 and Six Months 2021 was a gain of $ 7 million and $ 4 million, respectively.

The change in the ISCR of the FG VIEs’ assets held as of June 30, 2020 was a loss of $ 13 million and $ 16 million for Second Quarter 2020 and Six Months 2020, respectively.

The ISCR amount is determined by using expected cash flows at the original date of consolidation discounted at the effective yield, less current expected cash flows discounted at that same original effective yield.

The inception to date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the Company’s CDS spread from the most recent date of consolidation to the current period.

In general, if the Company’s CDS spread tightens, more value will be assigned to the Company’s credit;

however, if the Company’s CDS widens, less value is assigned to the Company’s credit.

March 31, 2021 December 31, 2020

The inception-to-date change in fair value of the FG VIEs’ liabilities with recourse attributable to the ISCR is calculated by holding all current period assumptions constant for each security and isolating the effect of the change in the insurance subsidiaries' CDS spread from the most recent date of consolidation to the current period.

In general, if the insurance subsidiaries' CDS spread tightens, more value will be assigned to insurance subsidiaries' credit;

however, if the insurance subsidiaries' CDS spread widens, less value is assigned to the insurance subsidiaries' credit.

June 30, 2021 December 31, 2020

(in millions)

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(1) FG VIEs’ liabilities with recourse will mature at various dates ranging from 2021 to 2038.

During First Quarter 2021, one AssuredIM Fund was deconsolidated, one new CLO and one CLO warehouse were consolidated, and one previously consolidated CLO warehouse was securitized and became a CLO.

There were no gains or losses on deconsolidation in First Quarter 2021.

As of March 31, 2021, the Company's CIVs consist of" six AssuredIM Funds, five CLOs and one CLO warehouse.

During Six Months 2021, five new CIVs were consolidated and one CIV was deconsolidated.

Two CLO warehouses were securitized and became CLOs during the period.

There were no gains or losses on deconsolidation in Second Quarter 2021 and Six Months 2021.

As of June 30, 2021, the Company's CIVs consist of six AssuredIM Funds, six CLOs and three CLO warehouses.

Substantially all of the CIVs are VIEs.

The Company consolidated these investment vehicles because it is deemed to be the primary beneficiary based on its power to direct the most significant activities of each VIE (through AssuredIM) and its level of economic interest in the entities (through AGAS).

The Company consolidates these investment vehicles because it is deemed to be the primary beneficiary based on its power to direct the most significant activities of each VIE (through AssuredIM) and its level of economic interest in the entities (through the Company's investment in AssuredIM Funds).

The assets and liabilities of the Company's CIVs are held within separate legal entities.

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In addition, creditors of the CIVs have no recourse against the assets of the Company, other than the assets of such applicable CIVs.

Liquidity available at the Company's CIVs is not available for corporate liquidity needs, except to the extent of the Company's investment in the fund, subject to redemption provisions.

Liquidity available at the Company's CIVs is not available for corporate liquidity needs, except to the extent of the Company's investment in the funds, subject to redemption provisions.

Assets and Liabilities

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

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Equity securities and warrants 10 18

Other (2) 1 —

Due from brokers and counterparties 49 35

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Loans in CLOs at fair value, collateralized financing entity (CFE) 2,546 1,291

Loans in CLO warehouses, at fair value option 189 170

Loans in CLO warehouses, fair value option 443 170

Short-term investments, at fair value 121 139

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Total assets (2) $ 3,547 $ 1,913

CLO obligations of CFE, at fair value (4)

Warehouse financing debt, at fair value option (5) 68 25

CLO obligations, at fair value, CFE (3)

Warehouse financing debt, fair value option (4) 123 25

Securities sold short, at fair value 44 47

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(1) Includes investment in affiliates of $ 10 million as of both March 31, 2021 and December 31, 2020.

(2) Includes forward currency contracts and interest rate swaps derivatives.

(3) Includes assets of a voting interest entity as of March 31, 2021 and December 31, 2020 of $ 57 million and $ 10 million, respectively.

(4) The weighted average maturity of CLO obligations was 6.0 years for March 31, 2021 and 5.6 years for December 31, 2020.

The weighted average interest rate of CLO obligations was 2.1 % for March 31, 2021 and 2.4 % for December 31, 2020.

(1) Includes investment in affiliates of $ 8 million and $ 10 million as of June 30, 2021 and December 31, 2020.

(2) Includes assets of a voting interest entity as of June 30, 2021 and December 31, 2020 of $ 74 million and $ 10 million, respectively.

(3) The weighted average maturity of CLO obligations was 6.1 years as of June 30, 2021 and 5.6 years as of December 31, 2020.

The weighted average interest rate of CLO obligations was 2.0 % as of June 30, 2021 and 2.4 % as of December 31, 2020.

CLO obligations will mature at various dates ranging from 2031 to 2034.

(5) The weighted average maturity of warehouse financing debt of CLO warehouses was 0.7 years for March 31, 2021 and 1.7 years for December 31, 2020.

The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.5 % for March 31, 2021 and 1.7 % for December 31, 2020.

Warehouse financing debt will mature in 2021.

As of March 31, 2021 and December 31, 2020, the CIVs had a commitment to invest $ 7 million and $ 6 million, respectively.

As of March 31, 2021, the CIVs included forward currency contracts and interest rate swaps with a notional of $ 54 million and $ 13 million, respectively, and average notional of $ 33 million and $ 10 million, respectively.

As of December 31, 2020, the CIVs included forward currency contracts and interest rate swaps with a notional of $ 11 million and $ 8 million, respectively, and average notional of $ 6 million and $ 4 million, respectively.

The fair value of the forward contracts and interest rate swaps is recorded in the "assets of CIVs" or "liabilities of CIVs" in the Company's condensed consolidated balance sheets.

The net change in fair value recorded in the "fair value gains (losses) of CIVs" in the condensed consolidated statements of operations for First Quarter 2021 were $ 2 million gains.

The CIVs did not have such contracts during First Quarter 2020.

The following table shows the information for assets and liabilities of the CIVs measured using the fair value option.

March 31, 2021 December 31, 2020

(in millions)

Excess of unpaid principal over fair value of loans in CLO warehouses $ 1 $ 1

Unpaid principal for warehouse financing debt 68 25

On December 23, 2020, BlueMountain CLO XXXI Ltd.

(CLO XXXI), as borrower, entered into a credit facility pursuant to which CLO XXXI may borrow for purposes of purchasing loans during the CLO warehouse stage.

Under the CLO XXXI credit facility, the principal amount may not exceed $ 360 million.

The current available commitment is determined by an advance rate of 75 % based on the amount of equity contributed to the warehouse.

Based on the current advance rate and amount of equity contributed, the available commitment for CLO XXXI as of March 31, 2021 was $ 90 million.

As of March 31, 2021, CLO XXXI has drawn down $ 68 million.

The scheduled maturity date under the credit facility is December 22, 2021.

The unpaid principal amounts will bear interest at a rate of 3-month LIBOR plus 130 basis points (bps).

Accrued interest on all loans will be paid on the maturity date or the closing date of the CLO, whichever is earlier.

The CLO warehouse was in compliance with all financial covenants as of March 31, 2021.

As of December 31, 2020, € 20 million (or $ 25 million) and € 1 million (or $ 1 million) had been drawn under a BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) credit facility with counterparties dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively.

During First Quarter 2021, EUR 2021-1 and AssuredIM repaid the borrowings under credit facility.

(4) The weighted average maturity of warehouse financing debt of CLO warehouses was 1.4 years as of June 30, 2021 and 1.7 years as of December 31, 2020.

The weighted average interest rate of warehouse financing debt of CLO warehouses was 1.7 % as of June 30, 2021 and 1.7 % as of December 31, 2020.

Warehouse financing debt will mature at various dates ranging from 2022 to 2023.

Redeemable Noncontrolling Interests in CIVs

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Net income (loss) — — — ( 2 )

March 31, $ 21 $ 8

June 30, $ 21 $ 20 $ 21 $ 20

As of June 30, 2021 and December 31, 2020, the CIVs had a commitment to invest $ 7 million and $ 6 million, respectively.

As of June 30, 2021, the CIVs included forward currency contracts and interest rate swaps with a notional of $ 21 million and $ 18 million, respectively, and average notional of $ 16 million and $ 13 million, respectively.

The fair value of the forward contracts and interest rate swaps is recorded in the "assets of CIVs" or "liabilities of CIVs" in the Company's condensed consolidated balance sheets.

The net change in fair value is recorded in the "fair value gains (losses) of CIVs" in the condensed consolidated statements of operations.

The net change in fair value of forward currency contracts and interest rate swaps were losses of $ 1 million in Second Quarter 2021 and gains of $ 1 million in Six Months 2021.

The CIVs did not have such contracts during Six Months 2020.

The following table shows the information for assets and liabilities of the CIVs measured using the fair value option.

June 30, 2021 December 31, 2020

(in millions)

Excess of unpaid principal over fair value of:

Loans in CLO warehouses $ 2 $ 1

Liabilities in CLO warehouses 1 —

Unpaid principal for warehouse financing debt 123 25

The change in the ISCR of the CLO warehouses’ assets held as of June 30, 2021 that was recorded in the condensed consolidated statements of operations for both Second Quarter 2021 and Six Months 2021 was a gain of $ 1 million.

The amount of ISCR on each underlying loan in the CIVs is the difference between (1) the hypothetical price determined using the discount margin at the beginning of the period and (2) the market price.

Certain of the Company’s CIVs have entered into financing arrangements with financial institutions, generally to provide liquidity to such CIVs during the CLO warehouse stage.

Borrowings are generally secured by the investments purchased with the proceeds of the borrowing and/or the uncalled capital commitment of each respective vehicle.

When a CIV borrows, the proceeds are available only for use by that investment vehicle and are not available for the benefit of other investment vehicles or the Company.

Collateral within each investment vehicle is also available only against borrowings by that investment vehicle and not against the borrowings of other investment vehicles or the Company.

As of June 30, 2021, these credit facilities had varying maturities ranging from October 1, 2021 to April 23, 2023 with the aggregate principal amount not exceeding $ 1,147 million.

The available commitment was based on the amount of equity contributed to the warehouse and was $ 199 million.

As of June 30, 2021, $ 97 million was drawn down under credit facilities with the interest rates ranging from 3-month Euribor plus 85 basis points (bps) to 3-month LIBOR plus 165 bps (with a floor on the LIBOR/Euribor rates of zero).

The CLO warehouses were in compliance with all financial covenants as of June 30, 2021.

As of December 31, 2020, € 20 million (or $ 25 million) and € 1 million (or $ 1 million) had been drawn under a BlueMountain EUR 2021-1 CLO DAC (EUR 2021-1) credit facility dated August 26, 2020 by EUR 2021-1 and AssuredIM, respectively.

During the first quarter of 2021, EUR 2021-1 and AssuredIM repaid the borrowings under this credit facility.

Effect of Consolidating FG VIEs and CIVs

The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment), includes (1) the establishment of the FG VIEs assets and liabilities and related changes in fair value on the condensed consolidated financial statement, (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs, and (3) eliminating the investment balances associated with the insurance subsidiaries' purchases of the debt obligations of the FG VIEs.

The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows.

The economic effect of the Company's ownership interest in CIVs are presented in the Insurance segment as equity in earnings of investees, and as separate line items on a consolidated basis.

The effect of consolidating FG VIEs (as opposed to accounting for the related insurance contracts in the Insurance segment) includes (1) the establishment of the FG VIEs' assets and liabilities and related changes in fair value on the condensed consolidated financial statements, (2) eliminating the premiums and losses associated with the financial guaranty insurance contracts between the insurance subsidiaries and the FG VIEs, and (3) eliminating the investment balances associated with the insurance subsidiaries' purchases of the debt obligations of the FG VIEs.

The effect of consolidating CIVs (as opposed to accounting for them as equity method investments in the Insurance segment) has a significant effect on assets, liabilities and cash flows, and includes (1) the establishment of the assets and liabilities of the CIVs, and related changes in fair value, (2) eliminating the asset management fees earned by AssuredIM from the CIVs, and (3) eliminating the equity method investments of the insurance subsidiaries and related equity in earnings of investees.

The economic effect of the Company's ownership interest in CIVs is presented in the Insurance segment as equity in earnings of investees, and as separate line items on a consolidated basis.

The table below reflects the effect of consolidating FG VIEs and CIVs.

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Increase (Decrease)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

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Total assets $ 3,424 $ 1,903

Liabilities and shareholders’ equity

Unearned premium reserve (3) $ ( 36 ) $ ( 38 )

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Redeemable noncontrolling interests (4) 21 21

Shareholders’ equity

Retained earnings 26 22

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Increase (Decrease)

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

Net earned premiums (1) $ ( 1 ) $ ( 1 )

Net investment income (2) ( 1 ) ( 1 )

Asset management fees (3) ( 2 ) ( 1 )

Fair value gains (losses) on FG VIEs (1) $ 8 $ 1 $ 13 $ ( 8 )

Fair value gains (losses) on CIVs 21 31 37 19

Loss and LAE (1) ( 3 ) 6

Equity in earnings of investees (2) ( 14 ) ( 26 ) ( 24 ) ( 16 )

Other (3) ( 6 ) ( 1 ) ( 13 ) 2

Effect on income before tax 9 5 13 ( 3 )

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(1) Represents the elimination of insurance revenues and expenses related to the insurance subsidiaries' guarantee of FG VIEs’ liabilities with recourse.

(2) Represents the elimination of investment income related to the insurance subsidiaries' purchases of insured FG VIEs’ debt.

(3) Represents the elimination of intercompany asset management fees.

(1) Changes in fair value of the FG VIEs’ liabilities with recourse that are attributable to factors other than changes in the Company's own credit risk.

Included in other income (loss) in the condensed consolidated statements of operations.

(2) Represents the elimination of the equity in earnings in investees of AGAS and the other subsidiaries' investments in the consolidated AssuredIM Funds.

(3) Includes net earned premiums, net investment income, asset management fees, loss and LAE and other operating expenses.

(4) Represents the proportion of consolidated AssuredIM Funds' income that is not attributable to AGAS' or any other subsidiaries' ownership interest.

The fair value gains on CIVs for First Quarter 2021 were attributable to realized gains or losses, changes in underlying investment prices and investment interest, net of fees and expenses.

The fair value losses on CIVs for First Quarter 2020 were attributable to price depreciation on underlying assets.

Fair value gains on FG VIEs for First Quarter 2021 were attributable to price depreciation on insured fixed rate debt that were negatively impacted due to the assumptions in forward interest rates.

For First Quarter 2020, the fair value losses on FG VIEs were attributable to price depreciation due to the observed widening in the market spreads for the underlying collateral.

The fair value gains on CIVs for Second Quarter 2021 and Six Months 2021 were attributable to realized gains, changes in underlying investment prices and investment interest, net of fees and expenses.

The fair value gains on CIVs for Second Quarter 2020 and Six Months 2020 were attributable to price appreciation on underlying assets.

Fair value gains on FG VIEs in Second Quarter 2021 and Six Months 2021 are primarily due to increases in value on overcollateralized RMBS deals and price appreciation on the underlying collateral of fixed rate bonds.

For Second Quarter 2020, the fair value gains were primarily due to price appreciation due to observed tightening in market credit spreads for the underlying collateral, offset in part by the loss on consolidation of a new structured deal.

The fair value losses for Six Months 2020 were primarily due to price depreciation due to the observed widening in the market credit spreads for the underlying collateral.

Other Consolidated VIEs

In certain instances where the Company consolidates a VIE that was established as part of a loss mitigation negotiated settlement that results in the termination of the original insured financial guaranty insurance or credit derivative contract, the Company classifies the assets and liabilities of those VIEs in the line items that most accurately reflect the nature of the items, as opposed to within the FG VIEs’ assets and FG VIEs’ liabilities.

The largest of these VIEs had assets of $ 95 million and liabilities of $ 9 million as of March 31, 2021, and assets of $ 96 million and liabilities of $ 3 million as of December 31, 2020, primarily recorded in the investment portfolio and credit derivative liabilities on the condensed consolidated balance sheets.

The largest of these VIEs had assets of $ 99 million and liabilities of $ 13 million as of June 30, 2021, and assets of $ 96 million and liabilities of $ 3 million as of December 31, 2020, primarily recorded in the investment portfolio and credit derivative liabilities on the condensed consolidated balance sheets.

Non-Consolidated VIEs

As described in Note 3, Outstanding Exposure, the Company monitors all policies in the insured portfolio.

Of the approximately 17 thousand policies monitored as of March 31, 2021, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (ASC) 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization.

The majority of the remaining

policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities.

As of March 31, 2021 and December 31, 2020, the Company identified 80 and 79 policies, respectively, that contain provisions and experienced events that may trigger consolidation.

Based on management’s assessment of these potential triggers or events, the Company consolidated 25 FG VIEs as of both March 31, 2021 and December 31, 2020.

The Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure.

Of the approximately 17 thousand policies monitored as of June 30, 2021, approximately 15 thousand policies are not within the scope of FASB Accounting Standards Codification (ASC) 810 because these financial guaranties relate to the debt obligations of governmental organizations or financing entities established by a governmental organization.

The majority of the remaining policies involve transactions where the Company is not deemed to currently have control over the FG VIEs’ most significant activities.

As of June 30, 2021 and December 31, 2020, the Company identified 81 and 79 policies, respectively, that contain provisions and experienced events that may trigger consolidation.

Based on management’s assessment of these potential triggers or events, the Company consolidated 24 and 25 FG VIEs as of June 30, 2021 and December 31, 2020, respectively.

Company’s exposure provided through its financial guaranties with respect to debt obligations of FG VIEs is included within net par outstanding in Note 3, Outstanding Exposure.

The Company manages funds and CLOs that have been determined to be VIEs, in which the Company concluded that it is not the primary beneficiary.

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The Company holds variable interests in a VIE which is not consolidated, as it has been determined that the Company is not the primary beneficiary, but in which it holds a significant variable interest.

This VIE has $ 178 million of assets and $ 51 million of liabilities as of March 31, 2021 and $ 204 million of assets and $ 9 million of liabilities as of December 31, 2020.

As of March 31, 2021, the Company had $ 71 million maximum exposure to losses relating to this VIE, which is limited to the carrying value of this investment.

This VIE has $ 190 million of assets and $ 50 million of liabilities as of June 30, 2021 and $ 204 million of assets and $ 9 million of liabilities as of December 31, 2020.

As of June 30, 2021, the Company had $ 90 million maximum exposure to losses relating to this VIE, which is limited to the carrying value of this investment.

Fair Value Measurement

9 unchanged sentences

As markets and products develop and the pricing for certain products becomes more or less transparent, the Company may refine its methodologies and assumptions.

During First Quarter 2021, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.

During Six Months 2021, no changes were made to the Company’s valuation models that had, or are expected to have, a material impact on the Company’s condensed consolidated balance sheets or statements of operations and comprehensive income.

The Company’s methods for calculating fair value produce a fair value that may not be indicative of net realizable value or reflective of future fair values.

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Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

There was a transfer of a fixed-maturity security from Level 3 into Level 2 during First Quarter 2020.

Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation.

There was a transfer of a fixed-maturity security from Level 3 into Level 2 during Six Months 2020.

There were no other transfers into or from Level 3 during the periods presented.

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The valuation of fixed-maturity investments is more subjective when markets are less liquid due to the lack of market based inputs.

As of March 31, 2021, the Company used models to price 209 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $ 1,318 million.

Most Level 3 securities were priced with the assistance of independent third parties.

As of June 30, 2021, the Company used models to price 217 securities, including securities that were purchased or obtained for loss mitigation or other risk management purposes, with a Level 3 fair value of $ 1,333 million.

All Level 3 securities were priced with the assistance of independent third parties.

The pricing is based on a discounted cash flow approach using the third party’s proprietary pricing models.

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Other invested assets also include equity method investments in an AssuredIM healthcare private equity fund and a distressed opportunity fund managed by a third party asset manager, for which fair value is measured at net asset value (NAV), as a practical expedient and therefore excluded from the fair value hierarchy.

The unfunded commitments for the AssuredIM healthcare private equity fund were $ 117 million as of March 31, 2021.

The unfunded commitments for the AssuredIM healthcare private equity fund were $ 121 million as of June 30, 2021.

The fund does not allow redemptions.

Committed Capital Securities

Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM, respectively, to issue an aggregate of $ 200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash.

Each of AGC and AGM have entered into put agreements with four separate custodial trusts allowing each of AGC and AGM to issue an aggregate of $ 200 million of non-cumulative redeemable perpetual preferred securities to the trusts in exchange for cash.

Each custodial trust was created for the primary purpose of issuing $ 50 million face amount of CCS, investing the proceeds in high-quality assets and entering into put options with AGC or AGM, as applicable.

The fair value of CCS, which is recorded in other assets on the condensed consolidated balance sheets, represents the difference between the present value of remaining expected put option premium payments under AGC's CCS and AGM’s Committed Preferred Trust Securities (the AGM CPS) agreements, and the estimated present value that the Company would hypothetically have to pay currently for a comparable security.

hypothetically have to pay currently for a comparable security.

The change in fair value of the AGC CCS and AGM CPS are recorded in fair value gains (losses) on committed capital securities in the condensed consolidated statements of operations.

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The NAVs are based on observable information.

Change in fair value of these assets is recorded in other operating expenses in the condensed consolidated statement of operations.

Change in fair value of these assets is recorded in other operating expenses in the condensed consolidated statements of operations.

Contracts Accounted for as Credit Derivatives

The Company’s credit derivatives in the Insurance segment primarily consist of insured CDS contracts, and also include interest rate swaps that qualify as derivatives under GAAP, which require fair value measurement with changes recorded in the statement of operations.

The Company did not enter into CDS contracts with the intent to trade these contracts and the Company may not unilaterally terminate a CDS contract absent an event of default or termination event that entitles the Company to terminate such contracts;

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Credit spreads capture the effect of recovery rates and performance of underlying assets of these contracts, among other factors.

Consistent with previous years, market conditions at March 31, 2021 were such that market prices of the Company’s CDS contracts were not available.

Consistent with previous years, market conditions at June 30, 2021 were such that market prices of the Company’s CDS contracts were not available.

Assumptions and Inputs

The various inputs and assumptions that are key to the establishment of the Company’s fair value for CDS contracts are as follows:

The various inputs and assumptions that are key to the measurement of the Company’s fair value for CDS contracts are as follows:

the gross spread, the allocation of gross spread among the bank profit, net spread and hedge cost, and the weighted average life which is based on debt service schedules.

The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within

the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources.

The Company obtains gross spreads on its outstanding contracts from market data sources published by third parties (e.g., dealer spread tables for the collateral similar to assets within the Company’s transactions), as well as collateral-specific spreads provided or obtained from market sources.

The bank profit represents the profit the originator, usually an investment bank, realizes for structuring and funding the transaction;

the net spread represents the premiums paid to the Company for the Company’s credit protection provided;

and the hedge cost represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.

and the hedge cost

represents the cost of CDS protection purchased by the originator to hedge its counterparty credit risk exposure to the Company.

With respect to CDS transactions for which there is an expected claim payment within the next twelve months, the allocation of gross spread reflects a higher allocation to the cost of credit rather than the bank profit component.

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Market sources determine credit spreads by reviewing new issuance pricing for specific asset classes and receiving price quotes from trading desks for the specific asset in question.

Management validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness.

The Company validates these quotes by cross-referencing quotes received from one market source against quotes received from another market source to ensure reasonableness.

In addition, the Company compares the relative change in price quotes received from one quarter to another with the relative change experienced by published market indices for a specific asset class.

Collateral specific spreads obtained from third-party, independent market sources are un-published spread quotes from market participants or market traders who are not trustees.

Management obtains this information as the result of direct communication with these sources as part of the valuation process.

Collateral specific spreads obtained from third-party, independent market sources are unpublished spread quotes from market participants or market traders who are not trustees.

The Company obtains this information as the result of direct communication with these sources as part of the valuation process.

The following spread hierarchy is utilized in determining which source of gross spread to use:

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• Credit spreads extrapolated based upon transactions of similar asset classes, similar ratings, and similar time to maturity.

The rates used to discount future expected premium cash flows ranged from 0.11 % to 2.52 % at March 31, 2021 and 0.19 % to 1.33 % at December 31, 2020.

The rates used to discount future expected premium cash flows ranged from 0.10 % to 1.91 % at June 30, 2021 and 0.19 % to 1.33 % at December 31, 2020.

The premium the Company receives is referred to as the “net spread.” The Company’s pricing model takes into account not only how credit spreads on risks that it assumes affect pricing, but also how the Company’s own credit spread affects the pricing of its transactions.

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Given market conditions and the Company’s own credit spreads, approximately 51 %, based on fair value, of the Company's CDS contracts were fair valued using this minimum premium as of December 31, 2020.

As of March 31, 2021, the corresponding percentage was de minimis.

As of June 30, 2021, the corresponding percentage was de minimis.

The percentage of transactions that price using the minimum premiums fluctuates due to changes in AGC's credit spreads.

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The amount of premium a financial guaranty insurance market participant can demand is inversely related to the cost of credit protection on the insurance company as measured by market credit spreads assuming all other assumptions remain constant.

This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor.

This is because the buyers of credit protection typically hedge a portion of their risk to the financial guarantor, due to

the fact that the contractual terms of the Company's contracts typically do not require the posting of collateral by the guarantor.

The extent of the hedge depends on the types of instruments insured and the current market conditions.

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The prices are generally determined with the assistance of an independent third party, based on a discounted cash flow approach.

The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "fair value gains (losses) on FG VIEs" in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in ISCR which is separately presented in other comprehensive income (OCI).

Interest income and interest expense are derived from the trustee reports and also included in "fair value gains (losses) on FG VIEs." The FG VIEs issued securities typically collateralized by first lien and second lien RMBS.

The net change in the fair value of consolidated FG VIEs’ assets and liabilities is recorded in "other income (loss)" in the condensed consolidated statements of operations, except for change in fair value of FG VIEs’ liabilities with recourse caused by changes in ISCR which is separately presented in other comprehensive income (OCI).

Interest income and interest expense are derived from the trustee reports and also included in "other income (loss)." The FG VIEs issued securities typically collateralized by first lien and second lien RMBS.

The fair value of the Company’s FG VIEs’ assets is generally sensitive to changes in estimated prepayment speeds;

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In general, the fair value of the FG VIEs’ assets is most sensitive to changes in the projected collateral losses, where an increase in collateral losses typically could lead to a decrease in the fair value of FG VIEs’ assets, while a decrease in collateral losses typically leads to an increase in the fair value of FG VIEs’ assets.

The third party utilizes an internal model to determine an appropriate yield at which to discount the cash flows of the security, by factoring in collateral types, weighted-average lives, and other structural attributes specific to the security being priced.

The expected yield is further calibrated by utilizing algorithms designed to aggregate market color, received by the independent third party, on comparable bonds.

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Inputs may include dealer price quotations, yield curves, credit curves, forward/CDS/index spreads, prepayments rates, strike and expiry dates, volatility statistics and other factors.

Investments in private investment companies are generally valued utilizing the net asset valuation.

Investments in private equity funds are generally valued utilizing net asset value.

Level 2 assets in the CIVs include assets of the consolidated CLOs, certain assets of the consolidated funds and derivative assets.

Level 3 assets in the CIVs include the remainder of the invested assets of consolidated funds.

Level 2 liabilities in the CIVs include fair value option warehouse financing debt used to fund CLO warehouse, securities sold short and derivative liabilities.

Level 3 liabilities of the CIVs include various tranches of CLO debt.

Level 2 liabilities in the CIVs include senior warehouse financing debt used to fund a CLO warehouse (measured under the fair value option), securities sold short and derivative assets or liabilities.

Level 3 liabilities of the CIVs include various tranches of CLO debt and first loss subordinated warehouse financing.

Significant changes to any of the inputs described above could have a material effect on the fair value of the consolidated assets and liabilities.

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Fair Value Hierarchy of Financial Instruments Carried at Fair Value

As of March 31, 2021

As of June 30, 2021

Fair Value Hierarchy

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Short-term investments

1,087 1,082 5 —

Other invested assets (1) 13 6 — 7

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(1) Includes Level 3 mortgage loans that are recorded at fair value on a non-recurring basis.

Excludes $ 79 million and $ 91 million of equity method investments measured at NAV as a practical expedient as of March 31, 2021 and December 31, 2020, respectively.

(2) Excludes $ 9 million and $ 8 million of equity investments measured at NAV as of March 31, 2021 and December 31, 2020, respectively.

Excludes $ 102 million and $ 91 million of equity method investments measured at NAV as a practical expedient as of June 30, 2021 and December 31, 2020, respectively.

(2) Excludes $ 9 million and $ 8 million of equity investments measured at NAV as of June 30, 2021 and December 31, 2020, respectively.

Changes in Level 3 Fair Value Measurements

The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during First Quarter 2021 and First Quarter 2020.

Rollforward of Level 3 Assets

The tables below present a roll forward of the Company’s Level 3 financial instruments carried at fair value on a recurring basis during Second Quarter 2021, Second Quarter 2020, Six Months 2021 and Six Months 2020.

Roll Forward of Level 3 Assets

At Fair Value on a Recurring Basis

First Quarter 2021

Second Quarter 2021

Fixed-Maturity Securities

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(in millions)

Fair value as of December 31, 2020 $ 101 $ 30 $ 255 $ 940 $ 296 $ 2 $ 54

Total pretax realized and unrealized gains/(losses) recorded in:

Fair value as of March 31, 2021 $ 103 $ 28 $ 246 $ 941 $ 281 $ 1 $ 37

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 2 (1) — (1) 5 (1) 5 (1) 19 (2) 2 (4) ( 6 ) (3)

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Settlements ( 1 ) — ( 12 ) ( 51 ) ( 13 ) — —

Fair value as of June 30, 2021 $ 110 $ — $ 248 $ 975 $ 287 $ 1 $ 31

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2021 $ 19 (2) $ — $ ( 6 ) (3)

Change in unrealized gains (losses) included in OCI related to financial instruments held as of June 30, 2021 $ 6 $ — $ 9 $ 3

Roll Forward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Second Quarter 2021

FG VIEs’ Liabilities

Recourse Without

Recourse Liabilities of CIVs

(in millions)

Fair value as of March 31, 2021 $ ( 120 ) $ ( 301 ) $ ( 17 ) $ ( 1,973 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2021 $ — $ 3 (4) $ ( 19 ) (3)

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) ( 33 ) (6) ( 3 ) (2) ( 7 ) (2) ( 8 ) (4)

Other comprehensive income (loss) — ( 2 ) — —

Issuances — — — ( 406 )

Settlements ( 1 ) 10 — 2

Fair value as of June 30, 2021 $ ( 154 ) $ ( 296 ) $ ( 24 ) $ ( 2,385 )

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2021 $ ( 35 ) (6) $ ( 3 ) (2) $ ( 8 ) (2) $ ( 2 ) (4)

Change in unrealized gains (losses) included in OCI related to financial instruments held as of June 30, 2021 $ ( 2 )

Roll Forward of Level 3 Assets

At Fair Value on a Recurring Basis

Second Quarter 2020

Fixed-Maturity Securities Assets of CIVs

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

Assets Corporate Securities Equity Securities and Warrants Structured Products Other

(in millions)

Fair value as of March 31, 2020 $ 86 $ 26 $ 253 $ 596 $ 368 $ 52 $ 32 $ 12 $ 103

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 1 (1) 1 (1) 2 (1) 7 (1) ( 50 ) (2) 3 (4) 7 (4) 3 (4) ( 25 ) (3)

Other comprehensive income (loss) 10 2 12 17 — — — — —

Purchases — — — 118 — 5 17 5 —

Sales — — — ( 21 ) — — ( 3 ) ( 14 ) —

Settlements — — ( 13 ) ( 3 ) ( 18 ) — — — —

VIE consolidations — — — — 18 — — — —

Fair value as of June 30, 2020 $ 97 $ 29 $ 254 $ 714 $ 318 $ 60 $ 53 $ 6 $ 78

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30,2020 $ 25 (2) $ 3 (4) $ 7 (4) $ 1 (4) $ ( 25 ) (3)

Change in unrealized

gains/(losses) included in OCI related to financial instruments held as of March 31, 2021 $ 2 $ ( 4 ) $ — $ 5 1

Rollforward of Level 3 Liabilities

gains (losses) included in OCI related to financial instruments held as of June 30, 2020 $ 10 $ 2 $ 11 $ 16 $ —

Roll Forward of Level 3 Liabilities

At Fair Value on a Recurring Basis

First Quarter 2021

Second Quarter 2020

FG VIEs’ Liabilities

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(in millions)

Fair value as of March 31, 2020 $ ( 262 ) $ ( 312 ) $ ( 82 ) $ ( 426 )

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 100 (6) ( 12 ) (2) 63 (2) ( 18 ) (4)

Other comprehensive income (loss) — ( 7 ) — —

Issuances — — — ( 362 )

Settlements 1 15 2 —

VIE consolidations — ( 16 ) ( 3 ) —

Fair value as of June 30, 2020 $ ( 161 ) $ ( 332 ) $ ( 20 ) $ ( 806 )

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2020 $ 100 (6) $ ( 11 ) (2) $ ( 11 ) (2) $ ( 18 ) (4)

Change in unrealized gains (losses) included in OCI related to financial instruments held as of June 30, 2020 $ ( 7 )

Roll Forward of Level 3 Assets

At Fair Value on a Recurring Basis

Six Months 2021

Fixed-Maturity Securities

Subdivisions Corporate Securities RMBS Asset-

Securities FG VIEs’

Assets Assets of CIVs - Equity Securities Other

(in millions)

Fair value as of December 31, 2020 $ 101 $ 30 $ 255 $ 940 $ 296 $ 2 $ 54

Total pretax realized and unrealized gains/(losses) recorded in:

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 3 (1) 2 (1) 7 (1) 11 (1) 18 (2) 4 (4) ( 24 ) (3)

Other comprehensive income (loss) 8 16 9 6 — — 1

Purchases — — — 211 — 22 —

Sales — ( 48 ) — ( 80 ) — ( 27 ) —

Settlements ( 2 ) — ( 23 ) ( 113 ) ( 27 ) — —

Fair value as of June 30, 2021 $ 110 $ — $ 248 $ 975 $ 287 $ 1 $ 31

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2021 $ 18 (2) $ 3 (4) $ ( 25 ) (3)

Change in unrealized

gains (losses) included in OCI related to financial instruments held as of June 30, 2021 $ 8 $ — $ 9 $ 8 1

Roll Forward of Level 3 Liabilities

At Fair Value on a Recurring Basis

Six Months 2021

FG VIEs’ Liabilities

Recourse Without

Recourse Liabilities of CIVs

(in millions)

Fair value as of December 31, 2020 $ ( 100 ) $ ( 316 ) $ ( 17 ) $ ( 1,227 )

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) ( 52 ) (6) 1 (2) ( 8 ) (2) ( 2 ) (4)

Other comprehensive income (loss) — ( 3 ) — —

Issuances — — — ( 1,158 )

Settlements ( 2 ) 22 1 2

Fair value as of March 31, 2021 $ ( 120 ) $ ( 301 ) $ ( 17 ) $ ( 1,973 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2021 $ ( 20 ) (6) $ 5 (2) $ — $ 6 (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held as of March 31, 2021 $ ( 1 )

Rollforward of Level 3 Assets and Liabilities

Fair value as of June 30, 2021 $ ( 154 ) $ ( 296 ) $ ( 24 ) $ ( 2,385 )

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2021 $ ( 55 ) (6) $ 2 (2) $ ( 8 ) (2) $ 4 (4)

Change in unrealized gains (losses) included in OCI related to financial instruments held as of June 30, 2021 $ ( 3 )

Roll Forward of Level 3 Assets

At Fair Value on a Recurring Basis

First Quarter 2020

Six Months 2020

Fixed-Maturity Securities Assets of CIVs

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Fair value as of December 31, 2019 $ 107 $ 41 $ 308 $ 658 $ 442 $ 47 $ 17 $ — $ 55

Total pretax realized and unrealized gains/(losses) recorded in:

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 2 (1) ( 6 ) (1) 5 (1) 14 (1) ( 87 ) (2) 8 (4) 3 (4) 3 (4) 23 (3)

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Settlements ( 1 ) — ( 24 ) ( 10 ) ( 55 ) — — — —

VIE consolidations — — — — 18 — — — —

Transfers out of Level 3 — — — ( 1 ) — — — — —

Fair value as of March 31, 2020 $ 86 $ 26 $ 253 $ 596 $ 368 $ 52 $ 32 $ 12 $ 103

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2020 $ ( 35 ) (2) $ 5 (4) $ ( 4 ) (4) $ — $ 48 (3)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at March 31, 2020 $ ( 21 ) $ ( 8 ) $ ( 46 ) $ ( 58 )

Rollforward of Level 3 Liabilities

Fair value as of June 30, 2020 $ 97 $ 29 $ 254 $ 714 $ 318 $ 60 $ 53 $ 6 $ 78

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2020 $ ( 11 ) (2) $ 8 (4) $ 3 (4) $ 1 (4) $ 23 (3)

Change in unrealized gains (losses) included in OCI related to financial instruments held at June 30, 2020 $ ( 11 ) $ ( 6 ) $ ( 34 ) $ ( 41 ) $ —

Roll Forward of Level 3 Liabilities

At Fair Value on a Recurring Basis

First Quarter 2020

Six Months 2020

FG VIEs’ Liabilities

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Fair value as of December 31, 2019 $ ( 185 ) $ ( 367 ) $ ( 102 ) $ ( 481 )

Total pretax realized and unrealized gains/(losses) recorded in:

Total pre-tax realized and unrealized gains (losses) recorded in:

Net income (loss) 23 (6) 4 (2) 74 (2) 37 (4)

Other comprehensive income (loss) — 6 — —

Issuances — — — ( 362 )

Settlements 1 41 11 —

Fair value as of March 31, 2020 $ ( 262 ) $ ( 312 ) $ ( 82 ) $ ( 426 )

Change in unrealized gains/(losses) included in earnings related to financial instruments held as of March 31, 2020 $ ( 73 ) (6) $ 15 (2) $ 11 (2) $ 55 (4)

Change in unrealized gains/(losses) included in OCI related to financial instruments held at March 31, 2020 $ 13

VIE consolidations — ( 16 ) ( 3 ) —

Fair value as of June 30, 2020 $ ( 161 ) $ ( 332 ) $ ( 20 ) $ ( 806 )

Change in unrealized gains (losses) included in earnings related to financial instruments held as of June 30, 2020 $ 27 (6) $ 4 (2) $ ( 1 ) (2) $ 37 (4)

Change in unrealized gains (losses) included in OCI related to financial instruments held at June 30, 2020 $ 6

____________________

(1) Included in net realized investment gains (losses) and net investment income.

(2) Included in fair value gains (losses) on FG VIEs.

(2) Included in other income (loss).

(3) Recorded in fair value gains (losses) on CCS, net investment income and other income.

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(5) Represents the net position of credit derivatives.

Credit derivative assets (recorded in other assets) and credit derivative liabilities (presented as a separate line item) are shown as either assets or liabilities in the condensed consolidated balance sheet based on net exposure by transaction.

(6) Reported in net change in fair value of credit derivatives.

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Quantitative Information About Level 3 Fair Value Inputs

At March 31, 2021

Financial Instrument Description Fair Value at March 31, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

At June 30, 2021

Financial Instrument Description Fair Value at June 30, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Fixed-maturity securities (1):

Obligations of state and political subdivisions $ 110 Yield 4.0 % - 34.4 % 5.9 %

Corporate security 28 Yield 32.2 %

RMBS 248 CPR 0.0 % - 20.0 % 8.7 %

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Term (years) 10 years

Financial Instrument Description (1) Fair Value at March 31, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Financial Instrument Description (1) Fair Value at June 30, 2021 (in millions) Significant Unobservable Inputs Range Weighted Average (4)

Credit derivative liabilities, net $ ( 154 ) Year 1 loss estimates 0.0 % - 100.0 % 1.9 %

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CLO obligations of CFE (5) ( 2,359 ) Yield 1.6 % - 12.8 % 2.3 %

Warehouse financing debt ( 26 ) Yield 9.8 % - 15.1 % 12.3 %

___________________

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Fair value is based on management’s estimate of what a similarly rated financial guaranty insurance company would demand to acquire the Company’s in-force book of financial guaranty insurance business.

It is based on a variety of factors that may include pricing assumptions management has observed for portfolio transfers, commutations, and acquisitions that have occurred in the financial guaranty market, as well as prices observed in the credit derivative market with an adjustment for illiquidity so that the terms would be similar to a financial guaranty insurance contract, and also includes adjustments for stressed losses, ceding commissions and return on capital.

The Company classified the fair value of financial guaranty insurance contracts as Level 3.

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Due from/to brokers and counterparties primarily consists of cash, margin deposits, and cash collateral with the clearing brokers and various counterparties and the net amounts receivable/payable for securities transactions that had not settled at the balance sheet date.

Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the condensed consolidated balance sheet where a contractual right of offset exists under an enforceable netting arrangement.

Due from/to brokers and counterparties represent balances on a net-by counterparty basis on the condensed consolidated balance sheets where a contractual right of offset exists under an enforceable netting arrangement.

The cash at brokers is partially related to collateral for securities sold short and derivative contracts;

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Fair Value of Financial Instruments Not Carried at Fair Value

As of March 31, 2021 As of December 31, 2020

As of June 30, 2021 As of December 31, 2020

Amount Estimated

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accrued interest, repurchase agreement liability, management fees receivables, promissory note receivable, receivables for securities sold and payables for securities purchased, for which the carrying value approximates fair value.

Includes a $ 19 million repurchase agreement liability entered into during First Quarter 2021.

Includes a $ 19 million repurchase agreement liability entered into during Six Months 2021.

(2) Carrying amount includes the assets and liabilities related to financial guaranty insurance contract premiums, losses, and salvage and subrogation and other recoverables net of reinsurance.

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Asset Management Fees

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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(1) To the extent that the Company's wind-down and/or opportunity funds are invested in AssuredIM managed CLOs, AssuredIM may rebate any management fees and/or performance compensation earned from the CLOs.

Gross management fees from CLOs, before rebates, were $ 14 million for First Quarter 2021 and $ 10 million for First Quarter 2020 .

The Company had management fees receivable, which are included in other assets on the condensed consolidated balance sheets, of $ 8 million as of March 31, 2021 and management and performance fees receivable of $ 5 million as of December 31, 2020.

The Company had no unearned revenues as of March 31, 2021 and December 31, 2020.

Gross management fees from CLOs, before rebates, we re $ 11 million, $ 7 million, $ 25 million and $ 17 million for Second Quarter 2021, Second Quarter 2020, Six Months 2021 and Six Months 2020, respectively .

The Company had management and performance fees receivable, which are included in other assets on the condensed consolidated balance sheets, of $ 9 million as of June 30, 2021 and $ 5 million as of December 31, 2020.

The Company had no unearned revenues as of June 30, 2021 and December 31, 2020.

AGL and its Bermuda subsidiaries AG Re, AGRO, and Cedar Personnel Ltd.

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Deferred and Current Tax Assets (Liabilities) (1)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

(in millions)

14 unchanged sentences

Provision for Income Taxes

The Company's provision for income taxes for interim financial periods is not based on an estimated annual effective rate due, for example, to the variability in loss reserves, fair value of its credit derivatives and VIEs, and foreign exchange gains and losses which prevents the Company from projecting a reliable estimated annual effective tax rate and pretax income for the full year 2021.

A discrete calculation of the provision is calculated for each interim period.

8 unchanged sentences

Effective Tax Rate Reconciliation

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

3 unchanged sentences

Foreign taxes — ( 1 ) 2 7

Deferred compensation — 2

Other — ( 3 ) — ( 1 )

Total provision (benefit) for income taxes $ 23 $ 34 $ 23 $ 30

Effective tax rate 18.5 % 15.4 % 16.5 % 18.5 %

The expected tax provision (benefit) is calculated as the sum of pretax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed.

Where there is a pretax loss in one jurisdiction and pretax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.

The following tables present pretax income and revenue by jurisdiction.

Pretax Income (Loss) by Tax Jurisdiction

First Quarter

The expected tax provision (benefit) is calculated as the sum of pre-tax income in each jurisdiction multiplied by the statutory tax rate of the jurisdiction by which it will be taxed.

Where there is a pre-tax loss in one jurisdiction and pre-tax income in another, the total combined expected tax rate may be higher or lower than any of the individual statutory rates.

The following tables present pre-tax income and revenue by jurisdiction.

Pre-tax Income (Loss) by Tax Jurisdiction

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

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Revenue by Tax Jurisdiction

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions)

$ 150 $ 313 $ 284 $ 406

Bermuda 28 45 58 59

Other 1 2 1 2

Total $ 196 $ 372 $ 373 $ 468

Pretax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.

As of March 31, 2021, AGUS and Assured Guaranty Overseas US Holdings Inc.

Pre-tax income by jurisdiction may be disproportionate to revenue by jurisdiction to the extent that insurance losses incurred are disproportionate.

As of June 30, 2021, AGUS and Assured Guaranty Overseas US Holdings Inc.

had open tax years with the U.S.

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Commitments and Contingencies

Legal Proceedings

Lawsuits arise in the ordinary course of the Company’s business.

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On October 1, 2018, AGFP filed an appeal with the Appellate Division of the Supreme Court of the State of New York, First Judicial Department, seeking reversal of the portions of the lower court's ruling denying AGFP’s motion for summary judgment with respect to LBIE’s sole remaining claim for breach of contract.

On January 17, 2019, the Appellate Division affirmed the Supreme Court's decision, holding that the lower court correctly determined that there are triable issues of fact regarding whether AGFP calculated its loss reasonably and in good faith.

reasonably and in good faith.

The trial was originally scheduled for March 9, 2020, but was postponed due to COVID-19.

On November 3, 2020, LBIE moved to reopen its Chapter 15 case in the United States Bankruptcy Court for the Southern District

of New York (the Bankruptcy Court) and remove this action to the United States District Court for the Southern District of New York for assignment to the Bankruptcy Court.

On November 3, 2020, LBIE moved to reopen its Chapter 15 case in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) and remove this action to the United States District Court for the Southern District of New York for assignment to the Bankruptcy Court.

On March 22, 2021, the Bankruptcy Court denied the motion and remanded the action to the Supreme Court.

On March 29, 2021, the action was reassigned to Justice Melissa A.

A pretrial hearing on certain evidentiary motions has been set for May 28, 2021, and trial is expected to be scheduled for the fall of 2021.

Trial is scheduled to begin on October 18, 2021.

Long-Term Debt

The principal and carrying values of the Company’s debt are presented in the table below.

Principal and Carrying Amounts of Debt

As of June 30, 2021 As of December 31, 2020

Principal Carrying

Value Principal Carrying

(in millions)

7% Senior Notes (1) $ 200 $ 197 $ 200 $ 197

5% Senior Notes (1) 500 499 500 498

3.15% Senior Notes (1) 500 494 — —

Series A Enhanced Junior Subordinated Debentures (2) 150 150 150 150

AGUS - long-term debt 1,350 1,340 850 845

AGUS - Intercompany loans 280 280 280 280

Total AGUS 1,630 1,620 1,130 1,125

6 7 / 8 % Quarterly Interest Bonds (1) (4)

100 71 100 71

6.25% Notes (1) (4) 230 146 230 145

5.6% Notes (1) 100 58 100 58

Junior Subordinated Debentures (2) 300 212 300 209

Total AGMH - long-term debt 730 487 730 483

AGM Notes Payable 2 2 3 3

Total AGM - notes payable 2 2 3 3

AGMH's long-term debt purchased by AGUS ( 154 ) ( 109 ) ( 154 ) ( 107 )

Elimination of intercompany loans payable ( 280 ) ( 280 ) ( 280 ) ( 280 )

Total $ 1,928 $ 1,720 $ 1,429 $ 1,224

____________________

(1) AGL fully and unconditionally guarantees these obligations.

(2) Guaranteed by AGL on a junior subordinated basis.

(3) Carrying amounts are different than principal amounts primarily due to fair value adjustments at the date of the AGMH acquisition, which are accreted or amortized into interest expense over the remaining terms of these obligations.

(4) Redeemed or partially redeemed in July 2021.

3.15% Senior Notes.

On May 26, 2021, AGUS issued $ 500 million of 3.15 % Senior Notes due 2031 ( 3.15 % Senior Notes) for net proceeds of $ 494 million.

The net proceeds from the issuance are being used for general corporate purposes, which include the redemption on July 9, 2021, of all of AGMH's debt maturing in 2101 and a portion of its debt maturing in 2102, as described below.

AGUS may redeem all or part of the 3.15 % Senior Notes at any time or from time to time prior to March 15, 2031 (the date that is three months prior to the maturity of the 3.15 % Senior Notes (the Par Call Date)), at its option, at a redemption price equal to the greater of (i) 100 % of the principal amount of the 3.15 % Senior Notes being redeemed;

and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed (excluding interest accrued to the redemption date) from the redemption date to the Par Call Date discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30- day months) at a discount rate equal to the Treasury Rate plus 25 basis points;

plus, in each case, accrued and unpaid interest on the 3.15 % Senior Notes to be redeemed to, but excluding, the redemption date.

AGUS may redeem all or part of the 3.15 % Senior Notes at any time or from

time to time on and after the Par Call Date, at its option, at a redemption price equal to 100 % of the principal amount of the 3.15 % Senior Notes being redeemed, plus accrued and unpaid interest on the 3.15 % Senior Notes to be redeemed to, but excluding, the redemption date.

The 3.15 % Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by AGL.

The 3.15 % Senior Notes are senior unsecured obligations of AGUS and rank equally in right of payment with all of AGUS’s other unsecured and unsubordinated indebtedness outstanding.

The guarantee is a senior unsecured obligation of AGL and ranks equally in right of payment with all of AGL’s other unsecured and unsubordinated indebtedness outstanding.

On July 9, 2021, a portion of the proceeds from the issuance of the 3.15 % Senior Notes was used to redeem $ 200 million of AGMH debt as follows:

all $ 100 million of AGMH's 6 7/8% Quarterly Interest Bonds due in 2101 and $ 100 million of the $ 230 million of AGMH's 6.25 % Notes due in 2102.

In the third quarter of 2021, the Company will recognize a loss of approximately $ 66 million on a pre-tax basis ($ 52 million after-tax) which represents the difference between the amount paid to redeem AGMH's debt and the carrying value of the AGMH debt.

The carrying value of the AGMH debt includes the unamortized fair value adjustments that were recorded upon the acquisition of AGMH in 2009.

Shareholders' Equity

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Changes in Accumulated Other Comprehensive Income (Loss) by Component

First Quarter 2021

Second Quarter 2021

Net Unrealized Gains (Losses) on Investments with no Credit Impairment Net Unrealized Gains (Losses) on Investments with Credit Impairment Net Unrealized Gains (Losses) on FG VIEs ’ Liabilities with Recourse due to ISCR

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(in millions)

Balance, March 31, 2021 $ 458 $ ( 36 ) $ ( 21 ) $ ( 35 ) $ 7 $ 373

Other comprehensive income (loss) before reclassifications 54 24 ( 2 ) ( 1 ) — 75

Amounts reclassified from AOCI to:

Net realized investment gains (losses)

Fair value gains (losses) on FG VIEs

— — ( 1 ) — — ( 1 )

Total before tax

4 — ( 1 ) — — 3

Tax (provision) benefit

( 1 ) — 1 — — —

Total amount reclassified from AOCI, net of tax 3 — — — — 3

Net current period other comprehensive income (loss) 51 24 ( 2 ) ( 1 ) — 72

Balance, June 30, 2021 $ 509 $ ( 12 ) $ ( 23 ) $ ( 36 ) $ 7 $ 445

Changes in Accumulated Other Comprehensive Income (Loss) by Component

Second Quarter 2020

Adjustment Cash Flow

(in millions)

Balance, March 31, 2020 $ 252 $ ( 66 ) $ ( 17 ) $ ( 38 ) $ 7 $ 138

Other comprehensive income (loss) before reclassifications 184 19 ( 6 ) — — 197

Amounts reclassified from AOCI to:

Net realized investment gains (losses)

12 ( 8 ) — — — 4

Fair value gains (losses) on FG VIEs

— — ( 1 ) — — ( 1 )

Total before tax

12 ( 8 ) ( 1 ) — — 3

Tax (provision) benefit

( 3 ) 2 — — — ( 1 )

Total amount reclassified from AOCI, net of tax 9 ( 6 ) ( 1 ) — — 2

Net current period other comprehensive income (loss) 175 25 ( 5 ) — — 195

Balance, June 30, 2020 $ 427 $ ( 41 ) $ ( 22 ) $ ( 38 ) $ 7 $ 333

Changes in Accumulated Other Comprehensive Income (Loss) by Component

Six Months 2021

Adjustment Cash Flow

(in millions)

Balance, December 31, 2020 $ 577 $ ( 30 ) $ ( 20 ) $ ( 36 ) $ 7 $ 498

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Tax (provision) benefit

( 1 ) 1 1 — — 1

Total amount reclassified from AOCI, net of tax 3 ( 2 ) ( 1 ) — — —

Net current period other comprehensive income (loss) ( 68 ) 18 ( 3 ) — — ( 53 )

Balance, March 31, 2021 $ 458 $ ( 36 ) $ ( 21 ) $ ( 35 ) $ 7 $ 373

Balance, June 30, 2021 $ 509 $ ( 12 ) $ ( 23 ) $ ( 36 ) $ 7 $ 445

Changes in Accumulated Other Comprehensive Income (Loss) by Component

First Quarter 2020

Six Months 2020

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Tax (provision) benefit

( 3 ) 4 1 — — 2

Total amount reclassified from AOCI, net of tax 15 ( 15 ) ( 2 ) — — ( 2 )

Net current period other comprehensive income (loss) 13 ( 27 ) 5 — — ( 9 )

Balance, March 31, 2020 $ 252 $ ( 66 ) $ ( 17 ) $ ( 38 ) $ 7 $ 138

Balance, June 30, 2020 $ 427 $ ( 41 ) $ ( 22 ) $ ( 38 ) $ 7 $ 333

Share Repurchases

As of May 6, 2021, the Company was authorized to purchase $ 147 million of its common shares.

On August 4, 2021, the Board of Directors (the Board) authorized the repurchase of an additional $ 350 million of

common shares.

Under this and previous authorizations, as of August 5, 2021, the Company was authorized to purchase $ 379 million of its common shares.

The Company expects to repurchase shares from time to time in the open market or in privately negotiated transactions.

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2021 (January 1 - March 31) 1,986,534 77 38.83

2021 (April 1 - May 6) 609,768 28 45.57

2021 (April 1 - June 30) 1,887,531 88 46.63

2021 (July 1- August 5) 1,226,040 58 47.02

Total 2021 5,100,105 223 $ 43.69

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Computation of Earnings Per Share

First Quarter

Second Quarter Six Months

2021 2020 2021 2020

(in millions, except per share amounts)

15 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements